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Post by Guest on May 8, 2016 1:12:47 GMT
Dear Oliver,
I was wondering when reading through your slides when you wrote the following: Walras law implies that Y=C+G. Could you explain where this equation comes from?
Additionally, when deriving an equation for wealth, you conclude that wealth equals consumption minus taxes. Assuming that G=T, shouldn't it rather be that W=C+G? also when I was deriving the equation I wasn't able to derive it to the equation you have available on the slides.
Thanks in advance!
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Post by Oliver on May 8, 2016 22:11:17 GMT
Hi,
In the model, total consumption (private consumption C plus government consumption G) must equal total output/income Y. In the model, there is no investment or foreign trade so I=0 and NX=0.
Wk9 Thu, Slide 11/14 - there is a mistake - thanks for pointing it out!
It should say:
Consumer’s present value lifetime wealth:
W = Yt + Y{t+1}/(1+r) − Tt + T{t+1}/(1+r)
(i.e. wealth is the present value of income net of taxes). Sorry for the mistake. There is also a correction added on Moodle.
Best
Oliver
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Post by Guest on May 8, 2016 22:18:39 GMT
Thanks for clarifying it!
Also, I thought that the definition of Wealth form earlier was that W=Yt+Yt+1/(1+r). Does it change with the introduction of taxes? Where do consumption disappear in the derivation? Or is what you wrote as definition of wealth rather an identity?
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Post by Oliver on May 8, 2016 23:05:58 GMT
Hi,
In the definition of wealth earlier in the lectures, we had ignored the possibility of taxes. So, the definition
W = Yt + Y{t+1}/(1+r) − Tt + T{t+1}/(1+r)
is a more general definition. And, yes, this is a definition rather than a identity.
Best
Oliver
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Post by Guest on May 8, 2016 23:23:13 GMT
Would your equation not suggest that W=Ct+Ct+1/1+r?
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Post by Oliver on May 8, 2016 23:26:16 GMT
Hi,
Yes it does - the consumer will consume all his wealth before he dies (at the end of the second period) - no point in leaving some of his wealth unconsumed. But, it is not a definition of wealth. That is rather an equilibrium result.
Best
Oliver
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Post by Guest on May 11, 2016 8:17:51 GMT
Should there be brackets around the Tt + T{t+1}/(1+r) so that the + T{t+1}/(1+r) becomes a minus?
Thanks
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gm
New Member
Posts: 19
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Post by gm on May 11, 2016 12:48:06 GMT
Yes, tomorrow's tax is also subtracted from lifetime wealth.
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Post by Oliver on May 11, 2016 22:46:35 GMT
Hi,
My mistake - yes, the equation should read:
W = Yt + Y{t+1}/(1+r) − Tt - T{t+1}/(1+r)
Best
Oliver
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