Income Share Trends and Distribution Analysis
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Questions and Answers

What does the Cobb-Douglas production function help analyze in the context of national income?

  • The correlation between technological change and inflation
  • The division of income between labour and capital (correct)
  • The effects of governmental spending on output
  • The impact of taxation on wages

If the share of income going to labour is represented by 'v', which of the following is true?

  • The value of 'v' is irrelevant to income distribution
  • The share of income going to capital is equal to 1-v (correct)
  • The value of 'v' must always equal 1
  • The share of income going to labour is fixed at 0.5

What is the estimated value of 'v' in the UK?

  • 0.65
  • 0.5
  • 0.75 (correct)
  • 0.85

Which factor is NOT mentioned as influencing the income share?

<p>Investment trends (D)</p> Signup and view all the answers

Which formula represents the share of income going to labour?

<p>(MPN x N)/Y = (vY/N x N)/Y (B)</p> Signup and view all the answers

As per the information provided, how does the value of 'v' affect the income shares over time?

<p>It remains constant over time (A)</p> Signup and view all the answers

What is the primary reason attributed to the US running a large trade deficit in the long run?

<p>S^N - I &lt; 0 (A)</p> Signup and view all the answers

How does an increase in military spending affect interest rates?

<p>Interest rates increase (A)</p> Signup and view all the answers

What does MPN stand for in the context of the supply and demand aspects of national income?

<p>Marginal Product of Labour (D)</p> Signup and view all the answers

What impact do trade restrictions have on the demand for imports in a small open economy?

<p>Decrease the demand for imports (D)</p> Signup and view all the answers

What is represented by the constant 'A' in the Cobb-Douglas production function?

<p>Total factor productivity (B)</p> Signup and view all the answers

What remains unchanged in the loanable funds market when protectionist policies are implemented?

<p>Savings minus investment (A)</p> Signup and view all the answers

What occurs to the real exchange rate when foreign goods become more expensive due to a decrease in demand for imports?

<p>It increases (A)</p> Signup and view all the answers

Which of the following factors is said to not correct the US trade deficit in the long run?

<p>Implementing blanket trade restrictions (A), Shifting consumption to US goods (B), Expanding government spending (C)</p> Signup and view all the answers

What happens to the equilibrium in the loanable funds market when savings do not equal investment?

<p>An imbalance occurs that requires external borrowing (A)</p> Signup and view all the answers

What is the assumption regarding the export position when countries do not retaliate against trade restrictions?

<p>It will remain unchanged (B)</p> Signup and view all the answers

What is a primary factor that affects how long a country can sustain a trade deficit?

<p>The willingness of creditors to lend (C)</p> Signup and view all the answers

Which factor does NOT contribute to the low capital inflow to developing countries despite low capital-to-labor ratios?

<p>Competitive labor markets (A)</p> Signup and view all the answers

What is the significance of the US dollar in global finance?

<p>It is regarded as the world's currency. (A)</p> Signup and view all the answers

Which policy approach is NOT suggested for enhancing long-term output?

<p>Increasing tax burdens on innovation (B)</p> Signup and view all the answers

Which of the following best explains the relationship between capital flows and production conditions?

<p>Higher capital flows occur in favorable production conditions. (D)</p> Signup and view all the answers

What impact do trade restrictions typically have on output in the long run?

<p>They have no effect on output. (D)</p> Signup and view all the answers

What is expected to happen to the US trade deficit in the long run?

<p>It will continue as long as foreign investors buy US government debt. (B)</p> Signup and view all the answers

Which of the following is NOT a suggested policy for improving economic productivity?

<p>Increasing barriers to business entry (D)</p> Signup and view all the answers

What happens to national saving when governments increase their spending?

<p>National saving falls (D)</p> Signup and view all the answers

Which of the following has contributed to the rise in inequality as measured by the Gini coefficient in the US since World War II?

<p>Rise in capital share (D)</p> Signup and view all the answers

What primarily drives the long-term trend of national saving in an economy?

<p>Household decisions (C)</p> Signup and view all the answers

If government expenditure increases while demand for loanable funds remains the same, what will likely happen to interest rates?

<p>Interest rates will increase (D)</p> Signup and view all the answers

Which factor is NOT mentioned as an explanation for the increase in inequality in the US?

<p>Tax cuts for the wealthy (B)</p> Signup and view all the answers

What has historically been an important driver of interest rates related to government spending?

<p>Government budget decision making (C)</p> Signup and view all the answers

In relation to the role of government in the economy, what are the short-term variations in national saving mainly dependent on?

<p>Government expenditure/tax decisions (C)</p> Signup and view all the answers

The trend of the Gini coefficient over the last few decades signifies what change in society?

<p>Increase in inequality (C)</p> Signup and view all the answers

Flashcards

Recession

A period of economic decline characterized by reduced output and productivity.

Gini Coefficient

A measure of income inequality within a population. A higher Gini coefficient indicates greater inequality.

National Savings

The total amount of funds available for lending in an economy.

Real Interest Rate

The rate of return on lending money.

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Government's Role in National Savings

Government spending and taxation decisions can significantly impact national savings and the real interest rate in the short run.

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Government Spending Impact

An increase in government spending often leads to a decrease in national savings and a rise in real interest rates.

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Government Spending in Historical Events

Historical episodes, particularly wars, often feature high government spending, which impacts national savings and interest rates.

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Real World Examples

Historical examples demonstrating the impact of government spending on interest rates often involve periods of high government spending, such as during wars.

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Income Distribution in Cobb-Douglas Production Function

The share of national income that goes to labor and capital depends on how the marginal product of each factor changes with the input levels (K and N).

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Cobb-Douglas Production Function

A production function that assumes constant returns to scale and a constant share of income going to each factor, labor and capital. This means that if you double the amount of labor and capital, you'll double the output.

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Marginal Product of Labor (MPN)

The change in output that results from hiring one more unit of labor, holding capital constant. It represents the real wage in the Cobb-Douglas model.

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Marginal Product of Capital (MPK)

The change in output that results from adding one more unit of capital, holding labor constant. It represents the real rental price of capital in the Cobb-Douglas model.

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Labor's Share of National Income

In the Cobb-Douglas model, the share of national income going to labor is determined by the exponent on labor (v). This share remains constant over time if v is constant.

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Capital's Share of National Income

In the Cobb-Douglas model, the share of national income going to capital is determined by the exponent on capital (1-v). This share remains constant over time if v is constant.

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Factors Influencing Income Distribution

Factors like technological change, bargaining power of firms and unions, and tax systems can influence the distribution of income between labor and capital in the long run.

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Short-Term Income Distribution Changes

Short-term fluctuations in the economy, such as business cycles, can cause temporary changes in the share of income going to labor and capital.

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Trade Restrictions in a Small Open Economy

In a small open economy, trade restrictions, like tariffs or quotas, won't significantly change overall savings (S) or investment (I) in the long run. The assumption is that other nations won't retaliate.

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Impact of Trade Restrictions on Net Exports

Trade restrictions in a small open economy can lead to a decrease in import demand, increasing net exports (NX). This pushes up the real exchange rate as foreign goods become more expensive.

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Capital Flow and Trade Deficit

The difference between national savings (S) and investment (I) in a large open economy reflects the capital flow (CF) and net exports (NX). A negative difference implies borrowing from other nations to finance domestic spending.

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Long-Run Trade Deficit

A persistent trade deficit in the long run suggests that national savings (S) are less than investment (I). This implies a need for borrowing from foreign nations to bridge the gap.

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Trade Restrictions and Trade Deficits

Trade restrictions alone won't solve a long-run trade deficit. The key lies in increasing national savings or reducing investment.

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Government Spending and Investment Impact on Trade Deficit

Higher government spending and increased investment exacerbate the trade deficit if national savings don't increase in the long run.

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Military Spending and Interest Rates

Military spending increases can push up interest rates.

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Importance of National Savings and Investment

The long-run analysis of a trade deficit highlights the importance of national savings and investment in determining the balance of trade.

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How long can a trade deficit persist?

The ability of a country to maintain a trade deficit depends on creditors' willingness to lend, the interest rates they demand, and the country's capacity to repay its debt.

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Why can the US sustain large trade deficits?

The US dollar's global dominance makes it a preferred currency for holding assets, enabling the US to maintain significant trade deficits.

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What drives capital flow to developing countries?

Capital flows to developing countries when the potential return on investment (MPK) is high, suggesting a lower capital-to-labor ratio (K/N) and opportunities for growth.

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Why do some developing countries receive less capital despite low K/N?

Factors like underdeveloped human capital, weak legal systems, and corruption can impede capital flows to developing countries, even with low K/N ratios.

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How can policies enhance long-run output?

Policies aimed at boosting productivity and the efficiency of markets can enhance long-term economic growth.

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What are some examples of policies for long-term economic growth?

Regulations, institutional reforms, and investments in human capital can all contribute to a more competitive and productive economy.

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How can tax policies encourage growth?

Tax incentives for entrepreneurship and innovation can spur economic advancement and create new opportunities for growth.

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What role does policy stability play in growth?

Stable fiscal and monetary policies can help reduce uncertainty and encourage businesses to take risks and invest in the long term.

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Study Notes

  • The share of labor income has a relatively flat, downward trend over time.
  • Factors influencing income share:
    • Technological change
    • Firm/trade union bargaining power
    • Tax systems
  • Short-term changes:
    • Short-run economic fluctuations (e.g., recessions) affect output and productivity, influencing income distribution.

Income Distribution

  • Beyond labor and capital shares, income inequality (measured by the Gini coefficient) in the U.S. has risen since World War II.
  • Possible explanations include:
    • Rising capital share
    • Expanding human capital/technology
    • Globalization

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Lecture 5 Using the Long-Run Model Lecture Notes PDF

Description

Explore the nuances of income share trends and income distribution in this insightful quiz. Delve into factors like technological change, economic fluctuations, and income inequality as measured by the Gini coefficient. Understand the complexities influencing labor and capital shares over time.

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