Lecture on Economics and Growth Models

Introduction to ASLM and Sticky Prices

• Initial assumption: Prices are completely sticky.
• Output is determined by aggregate demand in very short term.
• Over time, supply constraints appear, e.g., tight labor market.

Wage Determination

• Wages depend on expected price levels.
• Higher expected future price levels lead to higher wage demands.
• Wage demand decreases with higher unemployment (less bargaining power).
• Variable Z captures labor market institutions, affecting bargaining power.

Transition from Wages to Prices

• Introduction of a simplified production function.
• Output depends on employment.
• Tight labor markets increase production costs and prices.
• Firm pricing: Wage cost plus a markup.
• Higher markup reduces real wages firms are willing to pay.

Natural Rate of Unemployment

• Defined when expected price equals actual price.
• Real wage firms willing to pay and wage workers demand determines this rate.
• Not "natural"; depends on parameters like markup and labor market institutions.

Impact of Changes in Parameters

• Increased worker bargaining power or firm markups raise the natural rate of unemployment.

Prices and Inflation

• Link between employment, expected prices, and inflation.
• Simplified to Phillips Curve: Inflation depends on expected inflation, institutional parameters, and is inversely related to unemployment.

Expected Inflation and Wage Bargaining

• Workers set nominal wages based on expected inflation.
• Expected inflation acts as a proxy for actual inflation during wage bargaining.

Phillips Curve Developments

• Historical behavior: 1960s downward slope, 1970s shocks like oil price and unanchored expectations.

IS-LM-Phillips Curve Model

• Combines short run (IS-LM) with medium run (Phillips Curve).
• Central banks use interest rates to control inflation and output.

Policy Responses

• Fed can alter interest rates to stabilize the economy.
• Government can implement fiscal policies if monetary policy (Fed) is inactive.

Long-Term Growth and the Solow Model

• Explains convergence: Poorer countries grow faster than richer ones due to capital accumulation.
• Production function: Output is a function of capital and labor.
• Savings and investments drive capital accumulation.

Effects of Savings and Population Growth

• Higher savings rate boosts transitional growth, not long-term growth.
• Population growth affects output and capital per person.

Technological Progress

• Enhances labor effectiveness.
• Long-term growth affected by technology and population growth rates.

Education and Inequality

• More education affects output levels, not long-term growth rates.
• Technological differences explain global inequality beyond what the model predicts.

Key Concepts and Equations

• Wage Equation: W = f(expected price, unemployment, Z)
• Price Setting: P = W * (1 + markup)
• Phillips Curve: Inflation = f(expected inflation, unemployment, institutional factors)
• IS-LM Model: Links interest rates and output.
• Solow Model: Focuses on capital accumulation, savings, and population growth.*

This summary captures the essential elements of the lecture, focusing on the transition from short-term to long-term economic theories and models.