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Lecture 3

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McGill University
Economics (Arts)
ECON 460
William Watson

Lecture 3 ECON 460 Thursday, September 13, 2012 Keynes thinks you are always on the demand curve for labour but difficulty is that you may be of the supply curve (from Ch2) Chapter 3: The Principle of Effective Demand What’s the Z function?
What’s the D function? What are D a1d D ? 2  Z function: aggregate supply function; x-axis: N, y-axis: $; amount needed to be paid to employ that number of workers;  D function: aggregate demand function:  To right you want d function to be less than z function  D 1 D 2 D (consumption+investment)  What determines C: physiological law; cultural values; marginal propensity to consume is less than 1 What happens to employment if D = Z? What happens to D as income grows? [T]he volume of employment in equilibrium depends on (i) the aggregate supply function, f, (ii) the propensity to consume, c, and (iii) the volume of investment, D . 2 This is the essence of the General Theory of Employment” (emphasis supplied). What determines the real wage? What determines the level of investment? How does money have real effects on the economy (as opposed to the classical view, supposedly, that it has only nominal effects)? “Ricardo conquered England as completely as the Holy Inquisition conquered Spain...” ! “...Professional economists, after Malthus, were apparently unmoved by the lack of correspondence between the results of their theory and the facts of observation...”  Mathus: Anglican minister; known for population predictions Who were Karl Marx, Silvio Gesell, and Major Douglas?  Marx: demand side story  Gesell: looked at fluctuations in demand  Douglas: founded social credit party; didn’t trust central banks  Focused on possibility that classical system will go wrong General Theory: Book II: Definitions and Ideas Chapter 4: The Choice of Units I Chs. 4-6 “in the nature of a digression”
Is it good to start a book with three digressions? Three problems: choice of units of quantity; role of expectation; definition of income. II.i What are the units of measure you learn about in a Keynesian macro course? What (it turns out) did Keynes himself think of these units? How do you measure real output (“the volume of current output or real income and not the value of output or money-income”)? The stock of goods a “non-homogeneous complex.”  Concerned with output  Keynes doesn’t accept output as the unit; its too hard to add different kinds of outputs  Uses employment instead II.ii Calculating net addition to K stock even more difficult: How to compare old machines becoming obsolete with new machines replacing them?  Another non homogenous complex  Index number problem- anytime you have 2 or more different things and you want to add them up II.iii Vagueness of “the general price-level.”
Vagueness doesn’t bother business people. Should bother causal analysts.  Vague in the sense that everyone should be concerned of the price affecting their business but not in all of them; considers price level as inexact Was Queen Victoria a better queen and happier woman than Queen Elizabeth? (What is that all about?)  Notion of output not usual in telling about how people make decisions  Cost of living and standard of living concept’s are vague III Use employment to proxy output.
How to deal with different kinds of labour? Weight by wage. (Very Chicago!) The labour-unit: quantity in which employment is measured.  Wage reflects the marginal product  Labour unit measures difference in income and difference in wages; solving index number this way The wage-unit: the money-wage of a labour-unit. W.
If E is total wages (the “wage and salaries bill”), E = W x N. Use only these two variables in analy
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