宏观经济学课件Macro7.ppt

1、Chapter 7: The Analysis of Price Determination,Gang Gong,Copyright Notes:This electronic file is only used as a lecture notes for the student in this class. It is not allowed to be used for presentation anywhere else without the permission from the author.,Introduction,The objective of this chapter

2、is to discuss how price is determined in Keynesian analysis. Some textbooks would like to refer the analysis in this chapter as the medium analysis in contrast to short run analysis. This is because in the short run the price is assumed to be fixed, and therefore nothing we can say about the price d

3、etermination.,Introduction,Generally speaking, Keynesian economics does not exclude the market condition (excess demand or supply) as a factor to determine price. Yet in addition to the market condition, the cost of production is also important in price determination. This seems to be contrast to th

4、e Neo and New classical analysis according to which only the first is emphasized.,Wage Determination,In reality, wage may set by many ways. Collective bargaining between firms and union may be one way. The government may set up a minimum wage rate. Firms may simply decide a wage rate according to th

5、e market condition. Or a firm may even pay an efficiency wage (the wage level beyond the condition) to keep the worker work efficiently.,Wage Determination,Generally, one could have the following equation regarding the wage determination: where is the expected price, u is the unemployment rate and z

6、 represent other factors. In particular, one could assume,Wage Determination,Note that the above way of wage determination capture our two basic forces (market condition and cost) in determination of price.,Price Determination,In macroeconomics, the cost of a product in general is reflected by the w

7、age. Therefore one could write the price equation as P = (W+q)(1+) where q could be regarded as the production cost other than wage; the markup over the cost W+q.,Price Determination,It should be noted that there is no reason to believe and q are always fixed. One could think of as being a reflectio

8、n of the market condition in general industry while q as being determined by import price, change in productivity among others. All these can be regarded as supply shock.,Price Determination,There is no reason to believe is fixed. Indeed, one could think of as being a reflection of the market condit

9、ion in general industry. Thus, given the unemployment rate, one could determine the price and wage simultaneously by the wage and price equations.,Putting All Markets Together,We are now ready to put all markets together and construct a hypothetical “general” equilibrium model with one industry:,Put

10、ting All Markets Together,The model should includes the following equations: IS curve: LM curve: the production function: Y = F(N) the wage equation: the price equation: P = (W+q)(1+) the definition of u: u = 1 - N/L,Putting All Markets Together,The solution of this system can often be represented b

11、y the so-called aggregate demand and aggregate supply analysis. In particular, the IS and LM curves represents an aggregate demand curve since from them one can find a negative relation between P and Y.,Putting All Markets Together,The other four equations form an aggregate supply since from them one can find a positive relation bet