1 / 13

Capital Market

Capital Market. The Capital Market (Wall Street) Savings and Investment. Firms Borrow: Issue Debt and Equity Governments borrow: Issue Debt. Household’s Receive Income, Consume, and Save: Buy Debt and Equity. Investment. Savings. Capital Market (Wall St.): Determines rates of return

cicily
Télécharger la présentation

Capital Market

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Capital Market

  2. The Capital Market (Wall Street)Savings and Investment • Firms Borrow: • Issue Debt and Equity • Governments borrow: • Issue Debt Household’s Receive Income, Consume, and Save: Buy Debt and Equity Investment Savings Capital Market (Wall St.): Determines rates of return Supply of savings = Demand for savings (investment in new capital)

  3. Demand for Capital MPKt+1 Marginal Product of Capital (i.e., MPK) is diminishing in K Kt+1

  4. Demand for Capital • Suppose all firms can borrow at the real interest rate r • Firms invest to the point (d = depreciation rate on capital) r = MPKf(kt+1, nt+1)-d • MPKf refers to the future MPK (the future return to capital) • This margin determines the desired capital stock kt+1

  5. Demand for Investment kt+1=kt*(1-d)+it • Investment this year is capital available next year • kt is the capital stock • it the investment, and • kt+1 is capital stock at the beginning of t+1 Example: • kt = $100 • Depreciation rate = 5% (d = 0.05) • it = $7 • kt+1 = $102

  6. Demand for Capital and Investment rt rt Desired Capital Stock kt+1 determines investment demand id MPKf-d kt+1 it it = kt+1 - kt*(1-d)

  7. Drop in future TFP rt rt • A drop in future TFP reduces MPKf and hence shifts inward the Investment curve Investment Curve MPKf-d kt+1 it

  8. Key Message Education, Openness, Property Rights Protection TFP growth Investment boom, Real GDP growth and Rise in per-capita Income Greater wealth is created

  9. International Allocation of Capital • International capital market equilibrium ensures that for a given country rw= MPKi – d • Return on capital in each country is equal to the common world wide interest rate • Countries with higher TFP will have higher capital per unit of labor • Countries with higher TFP do not, in the long run, offer a higher return to capital

  10. Effects of Risk • What is the effect of a rise in sovereign risk? rw+rp = MPKi – d • rp is the risk premium demanded for investing in country i • As the risk premium rises, there is flight of capital from the country • Thailand, Brazil, Argentina suffered massive outflows of capital • Income and employment drop

  11. Long-Run Labor Market • A rise in employment raises the return to capital • In the long run capital adjusts so that the capital/labor ratio is consistent with the r+d=mpk relation • As capital adjusts, so too does the wage rate • In the long run, wages do not depend on the supply of labor (the labor demand curve is flat) • In the long run, wages only depend on TFP

  12. w n Long-Run Labor Market Equilibrium(k adjusts) • An increase in TFP shifts the MPN curve to MPN*. • The new equilibrium is at point Z with higher real wage and employment. • A shift in labor supply has no effect on the wage in the long run. Z MPN* X MPN Is the wage rate in India low because of the abundance of labor?

More Related