Video Transcript: Lesson 13

Hello, welcome back. We're gonna start unit five. This is the first lesson in unit  five, the single person economy. 

So let's kind of dive into the explanation of single person economy. The  macroeconomy is sort of complicated, right? Overall, economic performance  depends on billions of decisions made daily by millions of people. Economists  have developed techniques to keep us from being overwhelmed by the sheer  scale of the economy and the masses of data that are available to us. 

One of our favorite devices is to imagine that an economy, what it would look  like if it contained only one person, right? So this is a fictional story that has two  features to it. We do not have to worry about differences among individuals and  we can easily isolate the most important economic decisions. Thinking about the economy as if it were a single person is only a starting point though. 

It is an extremely useful trick for cutting through all the complexities of say a $12 trillion economy populated by 300 million individuals. So let's imagine that an  economy called Solovenia, right? Slovenia is populated by one individual and  let's call him Juan. Juan has access to an aggregate production function. 

The amount of output or the real GDP that he can produce depends on how  large a physical capital stock he owns, how many hours he chooses to work, his human capital and his technology. Physical capital is the stock of factories and  machinery in the economy while human capital refers to the skills and education of the workforce. Technology is a catch-all term for everything else other than  capital, labor or human capital that affects output. 

It includes the following, knowledge, the technological know-how of the  economy, social infrastructure, the institutions and social structures that allow a  country to produce its real GDP and natural resources, the land and mineral  resources inside that country or region. Now much of our focus in this chapter is  on how economies build up their stock of physical capital. Increases in the  capital stock lead to more output. 

If Juan has more tools to work with then he can produce more goods. However,  we usually think that the production function will exhibit diminishing marginal  product of capital. Remember, the more capital we have with the amount of  labor consistent, the more capital that we add, the marginal production will  diminish because we have too much capital, too much raw materials, et cetera,  which means that a given increase in the capital stock contributes more to  output when the capital stock is low than when the capital stock is high.

So the less capital stock that we have, the more it is valued inside the output  process, right? So if we have scarce materials, those materials will be more  valuable in our manufacturing process than if we had a ton of materials, right?  So each day, let's assume Juan chooses how much time to work and how much  time to spend in leisure. Other things being equal, we expect that Juan likes to  have some leisure time too. This is not to say that Juan never gets any  satisfaction from working, but like most people, even those who enjoy their jobs,  he would prefer to work a little bit less and play a little bit more. 

I'm sure we can all relate. He cannot spend all his time in leisure, however. He  works because he likes to consume. 

The harder he works, the more real GDP he can produce and consume. Juan's  decision about how many hours to work each day determined in large part by  how productive he can be. That is how much real GDP he can produce for each  hour of leisure time that he gives up. 

So Juan does not have to consume all the output that he produces. He might  save some for the future as well as deciding how much to work. He decides how much to consume and how much to save each day. 

You have probably made the same decisions like Juan's in your life. At some  point, you may have had to work a job, maybe in a fast food restaurant or  grocery store. Perhaps you were paid there weekly. 

Then each week, you might spend some of the money that you earned for the  movies, meals, clothes, et cetera. Or like Juan, you might have decided to  spend only some of that money and save some for the future. When you save  money instead of spending it, you are choosing to consume goods and services  at some future point instead of at this moment. 

You may choose to forgo the movies and clothes today to save for the purchase  of a car or a vacation. Remember, every little bit counts. The choice we have  just described, consuming versus savings, is one of the most fundamental  decisions in macroeconomics. 

It comes up again and again when we study the macroeconomy. Just as you  and Juan make this choice, so does the overall economy. Of course, the  economy doesn't literally make its own decision about how much to save. Instead, the saving decisions of each individual household in the economy  determine the overall amount of savings in the economy. And the economy as a  whole doesn't save the way you do. By putting money in a bank, an economy 

saves by devoting some of its production to capital goods rather than consumer  goods. 

If Juan chooses to produce capital goods, he will have a larger capital stock in  the future, which will allow him to be more productive and enjoy a higher  consumption rate in the future than if he didn't.