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2017 | OriginalPaper | Chapter

6. The Long-Run Model (The Classical World)

Author : Karl Seeley

Published in: Macroeconomics in Ecological Context

Publisher: Springer International Publishing

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Abstract

This chapter ties together the pieces from Chap. 4 to show how the equilibrium level of output is determined, and then how the output and the expenditure functions from Chap. 5 together tell us how much of each type of expenditure there is, as well as determining the equilibrium interest rate. Also, this is where the information about resource supply from Chap. 4 gets incorporated into the labor market in a way that allows the conditions of resource supply to help determine equilibrium in the labor market. The concept of “potential output” is introduced and identified with the equilibrium output level of the model here.

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Technological change can also involve changes in the exhaustibles share η, but for our current purposes that is secondary.

A modern explication of the theory is in [3].

We assume that investment either requires firms to borrow, forcing them to pay the interest rate, or will prevent them from lending the money spent on investment, thereby foregoing earning the interest rate.

See [6] for an interesting discussion.

This is addressed further in the discussion of “real business-cycle” models in Chap. 18

Basu, S., & Fernald, J. G. (2009). What do we know (and not know) about potential output? Federal Reserve Bank Of St. Louis Review, 91, 187–213

Cahn, C., & Saint-Guilhem, A. (2009). Issues on potential growth measurement and comparison: How Structural is the production function approach? Federal Reserve Bank Of St. Louis Review, 91, 221–240.

Friedman, M. (Ed.) (1956). Studies in the quantity theory of money. Chicago: University of Chicago Press.

Gordon, R. J. (2014). A new method of estimating potential real GDP growth: Implications for the labor market and the debt/GDP ratio. NBER working paper 20423.

Keynes, J. M. (1936/1973). The general theory of employment, interest, and money. London: Macmillan.

Nash, R. T., & Gramm, W. P. (1969). A neglected early statement of the paradox of thrift. History of Political Economy, 1, 395–400 (1969)

Title: The Long-Run Model (The Classical World)
Author: Karl Seeley
Publisher: Springer International Publishing
Book: Macroeconomics in Ecological Context
Print ISBN: 978-3-319-51755-1

Electronic ISBN: 978-3-319-51757-5

Copyright Year: 2017
DOI: https://doi.org/10.1007/978-3-319-51757-5_6