chapter 14 -- aggregate supply and economic growth zthis chapter -- looks at the effects of changes...
TRANSCRIPT
Chapter 14 -- Aggregate Supply and Economic Growth
This chapter -- looks at the effects of changes in Aggregate Supply, both short-run and long-run.
Correspondingly, we examine the causes that shift the AS curve and the LAS curve, and their effects on the economy.
Short-Run Aggregate Supply (AS)
Short-Run Aggregate Supply (AS) -- the sum of all the newly produced US final goods and services that firms wish to produce (real GDP supplied), given inflexible input prices (especially the nominal wage rate).
Short-Run Aggregate Supply (AS) -- Causes
Price Level (P)
P ASPrice of Energy (PE)
PE ASThe Nominal Wage Rate (W)
W AS
Short-Run Aggregate Supply -- More Causes
Labor Productivity (PROD), defined as output per labor hour.
PROD ASCapital Stock (K) -- all the existing
physical plant and equipment used by firms to produce goods and services.
K AS
Formalizing the AS Curve
Upward sloping when graphed against Price Level (P).
Changes in a cause other than P -- described as shifting the AS curve.
Changes in variables that increase AS, or enhance production, shift the AS curve rightward.
Changes in variables that decrease AS, or hinder production, shift the AS curve leftward.
Example 1 -- A Supply Shock
Example 1 -- The price of energy (PE) increases (energy crisis in US, 1973 and 1979).
PE hinders production, reduces Short-Run Aggregate Supply.
Therefore the AS curve shifts leftward.As a result, Y*, P* (Yuck!!).
Example 2 -- Productivity: The “Magic” Variable
Example 2 -- Labor productivity (PROD) increases (late 1990s, 2000 in US).
PROD increases Short-Run Aggregate Supply.
Therefore the AS curve shifts rightward.
As a result, Y*, P* (Wow!!).
Example 3 -- The Wage-Price Spiral
Example 3 -- Two Changes. (1) Increases in (G - T) (increase in government purchases, or decrease
in taxes) move Y* beyond YF and accelerate inflation. (2) Labor wants their wages to keep pace with inflation, so they get larger than normal wage increases (W).
Describing The Wage-Price Spiral -- AD-AS Model
(1) Increase in (G - T) shifts AD curve
rightward, Y* beyond YF, P*.(2) The rise in W is described by a shift of the AS curve leftward.
As a result Y* returns to its previous level, P* even more.
Creates a situation called Stagflation – inflation with stagnant output.
Tends to be a continuing process, i.e. “spiral”.
The Long-Run Aggregate Supply (LAS) Curve
Vertical when plotted versus the price level (P).
Vertical at the full sustainable level of real GDP (YF)
Shifting the LAS Curve
Curve shifts either rightward (increase in LAS) or leftward (decrease in LAS)
Variables that shift the LAS curve rightward, therefore, increase YF.
Variables that shift the LAS curve leftward, therefore, decrease YF.
Shift Variables – LAS Curve (Variables That Change YF)
Labor Productivity (PROD) PROD LAS
Capital Stock (K) -- all the existing plant and equipment used by firms to produce goods and services.
K LAS
More Shifters – LAS Curve (Variables That Change YF)
Size of Labor Force
Labor Force LASTastes/Preferences Toward Work.
Work LASTransfer Payments (TP)
TP LAS
Application #1 – What Makes YF Grow in the US?
Steady Growth in the Following Variables: Labor Force Capital Stock Accumulation Labor Productivity
Average Growth of YF in US: 2.5% per year
Not the same for all countries in the world.
Application #2 – Effects of a Productivity Boom
Suppose that increased technology (e.g. computerization) makes labor more productive.
Productivity growth increases, shifts LAS curve rightward more than usual.
Application #2 Continued -- Effects on YF
Therefore YF in the US grows at more than 2.5%.
This implies that actual real GDP (Y*) can enjoy higher growth without accelerating inflation.
Very nice!!
Goals for the Economy
Fluctuations -- seek to get the economy (Y*) as close to possible to a given YF (examples: standard fiscal and monetary policy) shift AD curve.
Economic Growth -- seek to increase the full sustainable level of real GDP (YF) shift LAS curve.
Ways to Increase Economic Growth (Increase YF)
Capital StockLabor ProductivityLabor ForceHousehold Attitudes Toward
WorkTransfer Payments
Trying to Increase Labor Productivity
Increase Research and Development.Increase Labor Quality (Human Capital)
– Education and Vocational Training.Promote Investment (plant and
equipment)!!! -- Tends to Incorporate New Technology. -- Also expands the capital stock.