[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

USING THE GENERAL EQUILIBRIUM MODEL
The general equilibrium model is useful because it enables us to understand the
effects of various changes in the economy—from the market in which these changes
originate to all the other markets in the economy.
Consider the effects on the economy of the introduction of personal computers.
By making workers more productive, personal computers increase the marginal
product of workers. This change increases the quantity of labor demanded at each
real wage, causing a shift in the labor demand curve to the right. The equilibrium real
wage rises, as shown in Figure 24.9, panel A.
The change in technology yields greater worker productivity. This change is represented
by an upward shift of the short-run production function as shown in panel
B. The improvement in productivity yields an increase in full-employment output.
Product market equilibrium can be maintained only if aggregate demand also rises
so that firms are able to sell the new higher level of output they are producing. As we
have seen, this change in demand will occur if the real interest rate adjusts to maintain
saving equal to investment in the capital market. Investment at each level of the
real interest rate may rise as firms take advantage of the profit opportunities opened
up by the new computer technology. At the same time, the increase in full-employment
income leads to increases in both consumption and saving at each interest rate. The
increases in investment and saving at each interest rate are represented by a rightward
shift in both the investment and the saving curves (panel C). In equilibrium, the
real interest rate may either rise, fall, or stay the same (as illustrated in panel C),
depending on the relative magnitudes of the shifts. Whatever the impact on the real
interest rate, we can conclude that equilibrium investment will rise.
We have focused here on the current effects of these changes, but there are
important future effects as well. A higher level of investment today will lead to more
plant and equipment tomorrow. The economy’s future capacity will increase, and
this expansion will contribute to future economic growth, a topic we will examine in
Chapter 27. Thus, links exist not only between all markets today but also between
today’s and future markets.
The basic full-employment model also can be used to examine the impact on the
labor, product, and capital markets of the rise in labor force participation rates
among women. The labor force participation rate is the fraction of a group that is in
the labor force (either employed or seeking work). In 1970, the female labor force
participation rate was 43 percent, compared to 80 percent for men. By 1999, the
female rate had risen to 60 percent. The change has pumped almost 20 million
additional workers into the U.S. economy.
The effects of this change are shown in Figure 24.10. The increased supply of workers
shifts the labor supply curve to the right. As panel A shows, the equilibrium real wage
falls, while equilibrium employment rises. Because the level of employment now associated
with equilibrium in the labor market has increased, potential GDP rises; this is
shown in panel B. With higher incomes, households will increase both their consumption
spending and their saving at each level of the real rate of interest. This impact on
the capital market is shown in panel C as a rightward shift in the saving curve. While
equilibrium saving and investment rise, the equilibrium real interest rate falls.
THE GENERAL EQUILIBRIUM MODEL ∂ 541