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2019 | OriginalPaper | Chapter

4. Extension of the Model to Capital

Authors : Thorsten Hens, Sabine Elmiger

Published in: Economic Foundations for Finance

Publisher: Springer International Publishing

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Abstract

The basic economic model from Chap. 3 already featured some realistic properties: real and not nominal prices determine equilibrium allocations, disequilibria in product markets imply disequilibria in labor markets and vice versa, and technological progress results in higher wages and profits.

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previous chapter The Basic Economic Model
next chapter Extension of the Model to an Infinite Horizon
Footnotes
1
We add an index to the utility function in both periods to indicate population growth. The utility function of the representative household increases over time, because it is the sum of individual utilities and the number of individuals in the population increases.
 
2
∂ L F(L d, K d) denotes the partial derivative with respect to the first argument and ∂ K F(L d, K d) denotes the partial derivative with respect to the second argument of the production function. Appendix A.8 explains partial derivatives in more detail.
 
3
The prices of the consumption good are normalized to 1, i.e., p 0 = p 1 = 1.
 
4
An isoprofit line is a line of combinations Y 0 − K d and Y 1 that yield the same amount of profits: \(Y_1=\operatorname {const}-(1+r)(Y_0-K^d)\).
 
5
For simplicity, we allow the size of the population to take noninteger values. We could write population growth differently to ensure integer values but the qualitative results would remain the same.
 
6
The maximum amount of labor, \(\bar L\), is normalized to one.
 
Literature
Fisher, I. (1930). The theory of interest. New York: Macmillan.
Metadata
Title
Extension of the Model to Capital
Authors
Thorsten Hens
Sabine Elmiger
Copyright Year
2019
Book
Economic Foundations for Finance

Print ISBN: 978-3-030-05425-0

Electronic ISBN: 978-3-030-05427-4

Copyright Year: 2019

DOI
https://doi.org/10.1007/978-3-030-05427-4_4