Calibrating the consumption of capital income

Basic Effective Demand Limit, L = labor share index * 0.76

Effective demand on real GDP = rGDPeT/L (1 -(1 - 1/e)T/L)

Effective Demand Monetary rule with NGDP targeting = z(T² + L²) - (1 - z)(T + L) + (1+a)current core inflation + acore inflation average - 2acore inflation target

z = (2L + Natural real rate)/(2L² + 2L) ............................ T = capacity utilization*(1 - unemployment rate)
UT index = L - T ... (UT index goes to zero at limit of business cycle.)

New economic thinking... effective demand limit upon the utilization of labor and capital

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09/03/2013

Calibrating the consumption of capital income

Here is a graph of labor and capital income's rate of consumption...

One thing about this graph is that capital income's consumption rate goes negative. How can this be calibrated. Well, the graph uses effective labor share. If I adjust the effective labor share down 2% for all quarters in the graph, we get this graph.

Capital income's rate of consumption rises by about 4% and now rests along the 0% line. Labor income's rate of consumption fell by 0.1%. So the adjustment for capital income was much larger than that for labor income.

But that is good, because the graph "looks" better now. But now the question arises... should effective labor share be lowered by 2%? This is something to keep in mind as time goes by.

Posted by Edward Lambert on 09/03/2013 in circular flow model, equation dynamics | Permalink

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Synopsis of Effective Demand

Data as of 3rdQ-2018
Effective Demand = $18.433 trillion
Real GDP = $18.671 trillion
Productive Capacity = $24.872 trillion
UT index is at effective demand limit = -0.92%
Effective demand limit = 74.1%
TFUR = 75.1%
ED Fed rate rule = 4.0%
Estimated Natural Real Interest rate = 2.3%
Short-term real interest rate = 2.8%

There is no recession for 3rdQ-2018. Chance of recession is growing as economy has now reached 2nd effective demand limit in this business cycle. I am forecasting that economic conditions will begin to contract in the second half of 2018.

Click on Graphs below to see updated data at FRED.

UT Index (measure of slack):