The Classical Long-Run Model

1. The Classical Long-Run Model

2. The Classical Long-Run Model • Adakalanya ahli ekonomi tidak bersetuju antara satu samalain (Economists sometimes disagree with each other) • Perbezaan di antara jnagka pendek dan panjang adalahpenting (Once distinction between long-run and short-run becomes clear) • Perkara-perkara yang menjadi punca perselihan pendapat boleh diselesaikan (Many apparent disagreements among macroeconomists dissolve) • Jika jangkamasa tidak nyatakan, perselisihan pendapatakan berlaku (If no time horizon is specified, however, an economist is likely to focus on horizon he or she feels is most important)

3. The Classical Long-Run Model • Secara ideal kita mahu prestasi pertumbuhan ekonomi kita baik dalm jangka panjang danpendek (Ideally, we would like our economy to do well in both long-run and short-run) • Tetapi terdapat trade-off di antara dua objektifini (Unfortunately, there is often a trade-off between these two goals) • Prestasi yg baik dlam jangka pendek mungkin memerlukan pengkorbaban objektif jangka panjang (Doing better in short-run can require some sacrifice of long-run goals, and vice versa)

4. Classical Long Run Model • C Long Run Model Polisi yang boleh membantu mengatasi masalah turun naik ekonmi mungkin boleh memberikan kesan buruk kpd pertumbuhan janhgka panjang ( Polices that can help us smooth out economic fluctuations may prove harmful to growth in the long-run) Manakala polisi-polisi yg dirumuskan untuk mencapai pertumbuhan tinggi mungkin diiringi pula dengan turun naik ekonomi yang ketara dalam jangka pendek (While policies that promise a high rate of growth might require us to put up with more severe fluctuations in short-run)

5. Macroeconomic Models: Classical Verses Keynesian • Model klasikal dirumuskan dalam abad 19 dan awal abad 20(Classical model, developed by economists in 19th and early 20th centuries, was an attempt to explain a key observation about economy) • Pandangan Klasikal – faktur-faktur beroperasi yang mengerak ekonomi ke arah gunatenaga penuh (Powerful forces are at work that drive economy towards full employment) • Dalam dtahun 1936, ahli ekonomi J.M. Keynes memberikan sebab mengapa prestasi ekonomi tidak memuaskan • (In 1936, in midst of Great Depression, British economist John Maynard Keynes offered an explanation for economy’s poor performance • Argued that, while classical model might explain economy’s operation in long-run, long-run could be a very long time in arriving

6. Macroeconomic Models: Classical Verses Keynesian • Idea Keynesian telah menjadi popular (Keynesian ideas became increasingly popular in universities and government agencies during 1940s and 1950s) • Makroekonomi adalah ekonomi keynesian (Macroeconomics was Keynesian economics) • Classical model was removed from virtually all introductory economics textbooks • Klasikal model masih lagi penting (Classical model is still important) • Dalam memahami ekonomi dlam jangka panjang Useful in understanding economy over long-run • Pndekatan keynesian boleh membantu kita memahami turn naikekonomi (While Keynes’s ideas and their further development help us understand economic fluctuations—movements in output around its long-run trend) • Model klasikal berguna di dalam memhami trend pertumbuhan ekonomijanhgka panjang (Classical model has proven more useful in explaining the long-run trend itself)

7. Assumptions of the Classical Model • Semua models dibina berdasarkan andaian-andaian (All models begin with assumptions about the world) • Classical model is no exception • Many of its assumptions are simplifying • Make model more manageable, enabling us to see the broad outlines of economic behavior without getting lost in details • Satu andaian yg mudah dalam klasikal model(One assumption in classical view that goes beyond mere simplification) • Jualan Terhabis Markets clear • Harga dlam pasaran akan membuat penyesuaian sehingga kuantiditawarkan sama dengan kuantiti diminta ( Price in every market will adjust until quantity supplied and quantity demanded are equal)

8. Assumptions of the Classical Model • Andaian yg mudah ini memberikan jawapan mengapa model klasikal adalah berguna dlam menerangkan trend perubahan ekonomi dlam jangka panjang ( Market-clearing assumption provides hint about why classical model does a better job over longer time periods (several years or more) than shorter ones) • Gunakan klasikal model di dalam menjawab beberapa soalan mengenai ekonomi dalam jangka panjang (We’ll use classical model to answer a variety of important questions about economy in long-run, such as) • Bagaimana jumlah gunatenaga ditentukan (How is total employment determined?) • Sebanyak mana output hendak dihasilkan (dHow much output will we produce?) • Peranan jumlah perbemlanjaan dalam ekonomi (What role does total spending play in the economy?) • Apa akan berlaku apabila perkara2 berubah ?What happens when things change?

9. How Much Output Will We Produce? • Bagaimanakah kita hendak melihat interaksi-interaksi dalam ekonomi How can we disentangle web of economic interactions we see around us? • Decide which market or markets best suit the problem being analyzed, and • Identify buyers and sellers • Identify type of environment in which they trade • Pasaran manakah kita nak tumpu ? But which market should we start with? • Logical start is market for resources • Labor, land and natural resources, capital and entrepreneurship • Tumpukan kpd Buruh We’ll concentrate our attention on labor • Our question is • Berapakah bilangna pekerja yg mendapat pekerjaan dalam ekonomi?How many workers will be employed in the economy?

10. Real Hourly Wage Excess Supply of Labor $20 15 Number of Workers Figure 1: The Labor Market LS B A E H J 10 Excess Demand for Labor LD 100 million = Full Employment

11. The Labor Market • Keluk penaawaran buruh adalah naik ke atas Labor supply curve slopes upward • Because—as wage rate increases—more and more individuals are better off working than not working • Thus, a rise in wage rate increases number of people who want to work—to supply their labor • Apabila kadar upah naik tiap2 firma –untukmemaksimakan keuntungan – ianya akan menggunakankurang pekerja As wage rate increases each firm will find that—to maximize profit—it should employ fewer workers than before • When all firms behave this way together a rise in wage rate will decrease quantity of labor demanded • This is why economy’s labor demand curve slopes downward • Pandangan klasikal, ekonomi akan mencapai gunatenagapenuh dengan sendiri In classical view, economy achieves full employment on its own

12. Determining the Economy’s Output • Soalan-soalan berkaitan analisis ekonomi mengikut pendekatan klasikal dibahagikan kepada dua soalan Accordingly, our classical analysis of economy is divided into two separate questions • Apakah keseimbangan J panjang ekonomi jikakeadaan teknologi konstant What would be the long-run equilibrium of the economy if there were a constant state of technology • And if quantities of all resources besides labor were fixed? • Apa akan berlaku kpd keseimbangan ini jika teknologidan sumber-sumber lain berubah What happens to this long-run equilibrium when technology and quantities of other resources change?

13. The Production Function • Perhubungan di antara gunatenaga dan jumlah pengeluaran diberikan oleh fungsi pengeluaran aggregat Relationship between total employment and total production in the economy • Given by economy’s aggregate production function • Shows total output economy can produce with different quantities of labor • Given constant amounts of other resources and current state of technology • Pendekatan klasikal – dalam jangka panjang ekonomi mencapai output potensi secara otomatik In classical, long-run view economy reaches its potential output automatically • An important conclusion of classical model and an important characteristic of the economy in long-run • Output tends toward its potential, full-employment level on its own, with no need for government to steer the economy toward it

14. Real Hourly Wage In the labor market, the demand and supply curves intersect to determine employment of 100 million workers. Number of Workers Output (Dollars) The production function shows that those 100 million workers can produce $7 trillion of real GDP. Number of Workers Figure 2: Output Determination in the Classical Model LS $15 LD 100 million Aggregate Production Function $7 Trillion = Full Employment Output 100 million

15. The Role of Spending • Apakah berlaku sekiranya firma tidak dapat menjual semua output What if business firms are unable to sell all output produced by a fully employed labor force? • Ekonomi tidak akan mengkekalkan gunatenaga penuhuntuk jangka masa lama Economy would not be able to sustain full employment for very long • Jika memberi penekanan bahawa output potensi adalah keseimbangan untuk ekonomi If we are asserting that potential output is an equilibrium for the economy • Jumlah perbalanjaan mestilah sama dengan jumlah pengeluaran Had better be sure that total spending on output is equal to total production during the year • Ini adalah pandangan Klasikal In classical view answer is yes

16. Total Spending in a Very Simple Economy • Gambarkan sebuah ekonomi yg mengandungidua unit ekonomiImagine a world with just two types of economic units • Households and business firms • Aliran PusinganCircular Flow • A diagram that shows how goods, resources, and dollar payments flow between households and firms • Ekonmi Mudah – isirumah dan firma membelanjkan semua pendapatanIn a simple economy with just households and firms in which households spend all of their income • Jumlah perbelanjaan sama dengan jumlah output Total spending must be equal to total output • Dekenali sebagai Hukum Say Known as Say’s Law

17. Households Goods Markets Factor Markets Firms Figure 3: The Circular Flow Goods and Services Demanded Resources Supplied $ Total Consumption Spending $ Total Income $ Total Revenue of Firms $ Total Factor Payments Goods and Services Supplied Resources Demanded

18. Total Spending in a Very Simple Economy • Say’s Law named after classical economist Jean Baptiste Say (1767-1832), who popularized the idea • Say’s law states that by producing goods and services • Firms create a total demand for goods and services equal to what they have produced or • Penawaran menciptakan permintaannya sendiri Supply creates its own demand

19. Total Spending in a More Realistic Economy • Bolehkah kita guna hukum ini kpd sesebuah ekonomi yang realistik? Does Say’s law also apply in a more realistic economy? • Dalam keadaan Dunia sebenar In the real world • Isirumah tidak membelanjakan semua pendapatanyaHouseholds don’t spend all their income • Tetapi sebahagian drp pendapatan disimpan ataumembayar cukai Rather, some of their income is saved or goes to pay taxes

20. Keadaan dunia sebanar • Mereka yg berbelanja dalam ekonomi bukanlah terdirihanya drp isrumah Households are not the only spenders in the economy • Peniaga-peniaga dan kerajaan membeli sebahagian drp barangan dan perkhidmatan yang dihasilkan Businesses and government buy some of the final goods and services we produce • Disamping pasaran untk barangan dan faktur, terdapat pasaran untuk tabungan pinjaman In addition to markets for goods and resources, there is also a loanable funds market • - Di mana tabungan isirunmah menjadi sumber pinjaman kpd firma dankerajaan Where household saving is made available to borrowers in business or government sectors

21. Some New Macroeconomic Variables • Pelaburan Terancang adalah jumlah pelaburantolak perubahan inventori Planned investment spending (IP) over a period of time is total investment spending (I) minus change in inventories over the period • IP = I – Δ inventories • Cukai bersih adalah jumlah hasil cukai tolakbayaran pindahan Net taxes (T) are total government tax revenue minus government transfer payments • T = total tax revenue – transfers

22. New Macroeconomic variable • Tabungan Isirumah Household saving (S) • Dua langkah untuk mendapatkan S It’s often useful to arrive at household saving in two steps • Pendapatan boleh guna isirumah • Household sector’s disposable income • Pendapatan boleh guna = Jumlah pendapatan –cukai bersih Disposable Income = Total Income – Net Taxes • Bahagian yg tidak dibelanjakan adalah Tabungan S Part that is not spent is defined as saving (S) • S = Pendapatan boleh guna – C S = Disposable Income – C • Total Spending in Classica • Dalam Classica , jumlah perbalanjaan adalah penjumlahan perbelanjaan oleh isirumah, sektor perniagaan dan sektor kerajaan In Classica, total spending is sum of purchases made by household sector (C), business sector (IP), and government sector (G) • Jumah Perbelanjaan = C + IP + G Total spending = C + IP + G • New Var

23. Some New Macroeconomic Variables • Tabunan dan Cukai bersih adalah bocoran Saving and net taxes are called leakages out of spending • Jumlah pendapatan yg tidak dibejanjakan Amount of income that households receive, but do not spend • Terdapat juga suntikan There are also injections—spending from sources other than households • Perbelanjaan kerajaan ke atas b/g A government’s purchases of goods and services • Perbelanjaan pelaburan terancang Planned investment spending (IP)

24. Some New Macroeconomic Variables • Jumlah perbelanjaan adalah sama dengan jumlah output sekiranya jumlah bocoran dalam ekonomi sama denganjumlah suntukan • Total spending will equal total output if and only if total leakages in the economy are equal to total injections • Sekiranya jumlah tabungan dan cukai bersih adalah sama dengan penjumlahan perbelanjaan pelaburan terancang dan pembelian kerajaan • only if sum of saving and net taxes is equal to sum of planned investment spending and government purchases

25. Some New Macroeconomic Variables • Jumlah perbelanjaan adalah sama dengan jumlah output sekiranya jumlah bocoran dalam ekonomi sama denaganjumlah suntukan Total spending will equal total output if and only if total leakages in the economy are equal to total injections • Only if sum of saving and net taxes is equal to sum of planned investment spending and government purchases

26. G ($1.25 ($2 T Trillion) Trillion) G ($2 Trillion) IP ($1.75 ($1 S Trillion) Trillion) IP ($1 Trillion) $7 Trillion $7 Trillion C C ($4 Trillion) ($4 Trillion) Total Total Total Output Income Spending Figure 4: Leakages and Injections Leakages Injections =

27. The Loanable Funds Market • Di mana isirumah menyediakan tabungan untuk mereka yg memerlukan modal/tabungan tambahan Where households make their saving available to those who need additional funds • Jumlah penawaran loanable funds adalah sama dengan jumlah tabungan isirumah Total supply of loanable funds is equal to household saving • Tabungan yg ditawarkan dipinjamkan dan isirumah menerimabayaran kadar faedah ke atas tabungan ini Funds supplied are loaned out, and households receive interest payments on these funds • Permintaan perniagaan untuk loanable funds adalah sama dengan perbelanjaan pelaburan terancang Businesses’ demand for loanable funds is equal to their planned investment spending • Modal/fund yg diperolehi adalah dipinjamkan, dan firma membayar faedah ke ataspinjaman ini Funds obtained are borrowed, and firms pay interest on their loans

28. The Loanable Funds Market • Budget deficit • Pembelian/perbalanjaan melebihi hasil cukai Excess of government purchases over net taxes • Budget of surplus/lebihan • Hasil cukai melebihi pembelian kerajaan Excess of net taxes over government purchases

29. The Loanable Funds Market • Defisit bajet G > T Defisit =G –T • Government runs a budget deficit equal to G – T • Lebihan bajet G < T Lebihan = T - G • Government runs a budget surplus equal to T - G

30. The Supply of Funds Curve • Oleh sebab kadar faedah adalah hadiah untk tabungan dan menawarkan fund/modal kpd paaran kewangan Since interest is reward for saving and supplying funds to financial market • Kenaikan i akan menambahkan kuantiti funds yg ditawarkan (tabubgan isirumah ), manakala kejatuhan i akan mengurangkannya Rise in interest rate increases quantity of funds supplied (household saving), while a drop in interest rate decreases it • Keluk penawaran funds Supply of funds curve • Menunjukkan tabubgan isirumah pada berbagai tinkat i Indicates level of household saving at various interest rates

31. Supply of funds curve • Kuantiti funds yg ditawarkan bergantung secara postif kpd i Quantity of funds supplied to the financial market depends positively on interest rate • Oleh sebab itu keluk tabungan atau penawaran fundsmencerun ke atas This is why the saving, or supply of funds, curve slopes upward • Lain-lain perkara boleh mempengaruhi tabungan selaindrp i Other things can affect savings besides the interest rate, including • Kadar cukai Tax rates • Jangkaaan masa hadapan Expectations about the future • Kesanggupan isirumah untuk menunda penggunaan General willingness of households to postpone consumption

32. As the interest rate rises, saving or the quantity of loanable funds supplied increases. Interest Rate Trillions of Dollars per Year Figure 5: Supply of Household Loanable Funds Saving (S) or Supply of Funds B 5% A 3% 1.5 1.75

33. The Demand for Funds Curve • Aabila kadar faedah jatuh , perbelanjaan pelaburan dan pinjaman perniagaan yg diperlukan untuk membiayainya bertambah • When interest rate falls investment spending and the business borrowing needed to finance it rise • Keluk Permintan untuk funds mencerun ke bawah Business demand for funds curve slopes downward • Permintaan kerajaan untuk funds ?What about government’s demand for funds? • Tidak banyak dipengaruhi oleh kadar faedah Will it, too, be influenced by the interest rate? • Probably not very much

34. The Demand for loanable funds • Defisit kerajaan dan permintaannya untuk funds adalah tidak dipengaruhi oleh kadar faedahGovernment sector’s deficit and its demand for funds are independent of interest rate • Apabila kadar faedah bertambah kuantiti funds yang di minta oleh firma peniagaan bertambah As interest rate decreases quantity of funds demanded by business firms increases • Kuantiti di minta oleh kerajaan tidak berubah While quantity demanded by government remains unchanged • Jumlah kuantiti funds yg diminta bertambah Therefore, total quantity of funds demanded rises

35. As the interest rate falls, business firms demand more loanable funds for investment projects. Interest Rate Trillions of Dollars per Year Figure 6: Business Demand for Loanable Funds A 5% B 3% Planned Investment (IP) or Business Demand for Funds 1.0 1.5

36. . . . and the govern-ment's demand for loanable funds . . . Summing business demand for loanable funds at each interest rate . . . gives us the economy's total demand for loanable funds at each interest rate. Interest Rate Government Demand for Funds (G – T) Total Demand for Funds [IP + (G – T)] Business Demand for Funds (IP) B B B 5% A A A 3% 1.0 1.5 0.75 1.75 2.25 Trillions of Dollars per Year Trillions of Dollars per Year Trillions of Dollars per Year Figure 7: The Demand for Funds

37. Equilibrium in the Loanable Funds Market • Mengikut pandangan klasikal, mekanisma pasaran loanable funds di andaikan melalui peroses “clearance”(terhabis) In classical view loanable funds market is assumed to clear • Kadar faedah akan jatuh atau naik sehingga kuatiti loanable funds yg ditawarkan sama dengan kuantiti diminta Interest rate will rise or fall until quantities of funds supplied and demanded are equal • Bolehkah dipastikan bahawa semua output yg dihasilkan pada guna tenaga penuh akan dibeli Can we be sure that all output produced at full employment will be purchased?

38. Interest Rate Trillions of Dollars Figure 8: Loanable Funds Market Equilibrium Total Supply of Funds (S) 5% E Total Demand for Funds [IP + (G – T)] 1.75

39. The Loanable Funds Market and Say’s Law • Selagi terdapat clearance dalam pasaran, hukumSay adalah benar As long as loanable funds market clears, Say’s law holds • Jumlah perbelanjaan sama dengan jumlah output Total spending equals total output • Ini adalah benar dalam ekonomi yg realistik dengan tabungan, cukai, pelaburtan dan dfisit kerajaan This is true even in a more realistic economy with saving, taxes, investment and government deficit • Here’s another way to see the same result, in terms of a simple equation • Loanable funds market clears  S = IP + (G – T) • Rearranging this equation by moving T to left side • Loanable funds market clears  S + T = IP + G

40. Hukum ini menunjukkan jumlah perbelanjaan dalan ekonomi adalah sama dengan jumlah nilaioutputSay’s law shows that total value of spending in economy will equal total value of output • Ianya mengenepkan pengeluran berlebihan atau berlebihan barangan dalam ekonomi Rules out a general overproduction or underproduction of goods in the economy • Ianya tidak menjanjikan tiap-tiap firma akan dapat menjualsemua barangan yg dihasilkan It does not promise us that each firm will be able to sell all of the particular good it produces

41. Loanable Funds Market Leakages Injections G ($2 Trillion) T ($1.25 Trillion) G ($2 Trillion) IP ($1 Trillion) S ($1.75 Trillion) IP ($1 Trillion) = $7 Trillion $7 Trillion C C ($4 Trillion) ($4 Trillion) Total Output Total Income Total Spending Figure 9: An Expanded Circular Flow $1.75 Trillion $1.0 Trillion $0.75 Trillion $1.25 Trillion

42. The Classical Model: A Summary • Began with a critical assumption • All markets clear • In classical model, government needn’t worry about employment • Economy will achieve full employment on its own • In classical model, government needn’t worry about total spending • Economy will generate just enough spending on its own to buy output that a fully employed labor force produces

43. Using the Theory: Fiscal Policy in the Classical Model • Bolehkah kerajaan menambahkan jumlah guna tenaga dan jumlah output dengan meningkatkan jumlah perbelanjaan? Could government increase economy’s total employment and total output by raising total spending? • Dua idea Two ideas for increasing spending come to mind • Kerajaan boleh pembelian lebh b/p Government could simply purchase more output itself • More goods, like tanks and police cars, or more services, like those provided by high school teachers and judges • Kerajaan boleh mengurangkan cukai bersih Government could cut net taxes, letting households keep more of their income • So they would spend more on food, clothing, furniture, new cars, and so on

44. Using the Theory: Fiscal Policy in the Classical Model • Polisi fizikal adalah perubahan kpd perbelanjaan atau cukai bersih Fiscal policy is a change in government purchases or in net taxes • Dirumuskan untuk mengubah jumlah perbelanjaan dalam ekonomi dan seterunya mempengaruhi tingkatguna tenaga dan output • Designed to change total spending in the economy and thereby influence levels of employment and output • Bolehkah polisi fizikal memberikan kesan Idea behind fiscal policy sounds sensible enough • But does it work? • Tidak sekiranya ekonomi berubah seperti model klasikal Not if economy behaves according to classical model

45. Using the Theory: Fiscal Policy With A Budget Deficit • Apa akan berlaku sekiranya kerajaan yg mengalami keadaan defist cuba menambahkan guna tenaga dan output dengan menambahkan perbelanjaan keajaan What would happen if the government of Classica—which is running a deficit—attempted to increase employment and output by increasing government purchases • Crowding out is a decline in one sector’s spending caused by an increase in some other sector’s spending • Dalam model klasikal , peningkatan perbelanjaan menyebabkan kejatuhan perbelanjaan sektor persendirian, jadi jumlah perbelanjaan tidak berubah In classical model a rise in government purchases completely crowds out private sector spending so total spending remains unchanged

46. Using the Theory: Fiscal Policy With A Budget Deficit • Dalam klasikal model, peningkatan perbelanjaan kerajaan tidak memberikan kesan kpd jumlah output dan jumlah guna tenaga • In classical model, an increase in government purchases has no impact on total spending and no impact on total output or total employment • Opposite sequence of events would happen if government purchases decreased • Total spending and total output would remain unchanged

47. Interest Rate Funds ($ Trillions) Figure 10: Crowding Out With An Initial Budget Deficit Total Supply of Funds (S) 7% B D IP A C H 5% DC D2 D1 1.75 2.05 2.25

48. Fiscal Policy With A Budget Surplus • Jumlah perbelanjaan tidak berubah, dan polisi fizikal adalah tidak berkesan Total spending remains unchanged, and fiscal policy is completely ineffective • Dengan keadaan defisit, kesan polisi fizikaladalah sama Same conclusion we reached about fiscal policy with a government budget deficit • Penilitian ke atas polisi fizikal menunjukkan bahawa dalam JP, usaha untuk mengubah perbelanjaan kerajaan adalah tidak diperlukan dantidak berkesan Our exploration of fiscal policy shows us that, in long-run Government efforts to change total output by changing government spending or taxes are unnecessary and ineffective

49. Funds ($ Trillions) Figure 11: Crowding Out With An Initial Budget Surplus S2 S1 B 7% DIP H C 5% A DC Business Demand for funds (IP) 1.25 1.55 1.75