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  Schmitt-Groh´e, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 5: Current Account in a Production Economy Slides for Chapter 5Current Account Determinationin a Production Economy Columbia UniversityFebruary 28, 2019 1  Schmitt-Groh´e, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 5: Current Account in a Production Economy ã  in this chapter we add investment in physical capital,  I  t , to ourtheoretical model of current account determination. To do so weadd a second economic agent, namely firms. ã  investment is an important determinant of the current account,as the current account is the difference between saving,  S  t , andinvestment,  I  t : CA t  =  S  t  − I  t ã  we will derive the adjustment of the economy to: (a) temporaryproductivity shocks; (b) anticipated future increases in productivity;and (c) world interest rate shocks.We begin by modeling the investment choice of firms. 2  Schmitt-Groh´e, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 5: Current Account in a Production Economy A production economy ã  2-period economy ã  output no longer an endowment, instead output is produced withphysical capital.The production function for output in period t,  Q t : Q t  =  A t F  ( I  t − 1 ) A t  >  0 for  t  = 1 , 2 denotes the level of technology in period  t ;  I  t − 1 denotes  investment   in  physical capital   in period  t − 1, which becomesproductive in period  t . That is, the investment decision of period t − 1 determines the capital stock in period  t . 3  Schmitt-Groh´e, Uribe, Woodford, “International Macroeconomics” Slides for Chapter 5: Current Account in a Production Economy 3 Properties of the function  F  ( · ):1.– output is zero when capital is zero:  F  (0) = 0.2.– output is increasing in capital:  F   ( I  t )  >  0.3.– output increases with capital at a decreasing rate:  F   ( I  t )  <  0.The marginal product of capital (MPK) is defined asMPK =  A t F   ( I  t − 1 )Property 2 says that the  MPK   is positive.Property 3 says that the  MPK   is declining in capital. This propertyis known as diminishing marginal product of capital.An example of a production function that satisfies all three propertiesis shown on the next slide. 4

Lecture 1

Oct 8, 2019
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