Y / W
KE = (1 -
) Y / (i PK)
With YR, P and i given from above, there is one degree of freedom from either PK or W. It is customary to close the model with a relationship that sets the average wage W. [73]
| YR = real income LE = employment KE = employed real capital stock KS = total real capital stock | LS = labour supply u = rate of unemployment W = average wage WT = W LE = total wage sum |
In a full model, the price of capital must relate to investments I and to wealth WN. Also, apart from a theory on unemployment, we also need a theory on idle capital KS - KE. We could also include intermediate goods, as these appeared to have been important in the Oil Crises. These alternatives however lead too far for our purposes.
Important for our purposes however is inflation. We already indicated that the price level P is relevant for inflation. The crucial thing to note is that inflation is the relative change of the price level, so that it is a dynamic concept.