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Chap10 Chap10 Presentation Transcript

    • Aggregate Expenditure (AE)
      • The total spending on goods and services produced in the country.
      • This spending consists of four elements and these are:
        • Consumer spending by households (C)
        • Investment expenditure by firms (I)
        • Spending by the government (G)
        • Exports to overseas countries (X)
    AE = C + I + G + ( X- M )
    • Aggregate output
      • The total quantity of goods and services produced (or supplied) in an economy in a given period.
    • Aggregate income
      • The total income received by all factors of production in a given period.
    • Aggregate output (income) (Y)
      • A combined term used to remind you of the exact equality between aggregate output and aggregate income.
    • National income
    • Y = C + S + T + M
    • National product
      • Y = C + I + G + X
    • In equilibrium:
    • C + S + T + M = C + I + G + X
    • or equivalently
    • S + T + M = I + G + X
    • Two ways to determine the equilibrium level of national income:
      • planned expenditure = planned output
      • Y = C + I + G + (X – M)
      • planned injection = planned leakages
      • I + G + X = S + T + M
      • I + G + X > S + T + M (expansion)
      • I + G + X < S + T + M (recession)
  • Circular Flow of National Income Model
    • Y = C + S
    • A household can do two, and only two, things with its income (Y):
      • It can buy goods and services -> consume (C)
      • It can save -> saving (S)
    • Consumption
      • Household purchases of final goods and services.
    • Saving
      • The part of its income that a household does not consume in a given period.
    • All income is either spent on consumption or saved in an economy in which there are no taxes.
    • Consumption is the dependent variable because depends on the disposable income.
    • Some determinants of aggregate consumption include:
      • Household income
      • Household wealth
      • Interest rate
      • Households’ expectations about the future
    • Consumption function:
      • The relationship between consumption and income, others thing constant.
    • For an individual household, the consumption function shows the level of consumption at each level of household income.
    • The household consumption increased with household income, assuming other determinants remain constant.
    • The higher your income is, the higher your consumption is likely to be.
  • Marginal Propensity to Consume (MPC)
    • Definition:
      • The fraction of a change in income that is consumed.
      • The change in consumption divided by the change in income caused it.
    • Formula:
    • Definition:
      • The part of its income that a household does not consume in a given period.
    • Once we know how much consumption will result from a given level of income, we know how much saving there will be.
    • Formula:
    Saving ≡ income − consumption S ≡ Y − C
    • Definition :
      • The relationship between saving and income while other things constant.
    • Figure:
    Marginal Propensity to Save (MPS) Δ S Δ Y Slope = ΔS /Δ Y
    • Definition:
      • The fraction of a change in income that is saved.
      • The change in saving divided by the change in income that caused it.
    • Formula:
    • The marginal propensity to consume plus the marginal propensity to save must sum to 1.
      • Because disposable income is either spent or saved.
    • Formula :
    • Question:
      • If Malaysia income increases from RM14.0 trillion to RM14.5 trillion, consumption increases by RM0.4 trillion and saving by RM0.1 trillion. What is the MPC and MPS?
  • AGGREGATE INCOME, Y (BILLIONS OF DOLLARS) AGGREGATE CONSUMPTION, C (BILLIONS OF DOLLARS) 0 100 80 160 100 175 200 250 400 400 600 550 800 700 1,000 850
    • At a national income of zero, consumption is $100 billion ( a ).
    • For every $100 billion increase in income (  Y ), consumption rises by $75 billion (  C ).
  • C > Y S (-ve) C < Y S (+ve) Y - C = S AGGREGATE INCOME (Billions of Dollars) AGGREGATE CONSUMPTION (Billions of Dollars) AGGREGATE SAVING (Billions of Dollars) 0 100 -100 80 160 -80 100 175 -75 200 250 -50 400 400 0 600 550 50 800 700 100 1,000 850 150
    • Investment
      • Refers to purchases by firms of new buildings and equipment and additions to inventories, all of which add to firms’ capital stock.
        • Inventory change is partly determined by how much households decide to buy, which is not under the complete control of firms.
    • Desired or planned investment
      • The additions to capital stock and inventory that are planned by firms.
    • Actual investment
      • The actual amount of investment that takes place; it includes items such as unplanned changes in inventories.
    change in inventory = production – sales
    • Assume that planned investment is fixed.
      • It does not change when income changes.
      • not to depend on the state of the economy.
    • Definition:
      • The total amount the economy plans to spend in a given period.
      • It is equal to consumption plus planned investment.
    • Formula:
    • Government expenditure (G)
      • Spending for goods and services by all levels of government.
    • Net taxes (T)
      • Taxes paid by firms and households to the government minus transfer payments made to households by the government.
    • Disposable income (Yd)
      • The income households have available to spend or to save after paying taxes and receiving transfer payment.
      • Formula:
    • disposable income ≡ total income − net taxes
    • [ Y d ≡ ( Y − T) ]
    • Budget deficit
      • The difference between what a government spends and what it collects in taxes in a given period.
      • Formula:
    [ budget deficit ≡ ( G − T) ]
    • Before taxes:
    • C = a + bY
    • After taxes:
    • C = a + bY d
    • or
    • C = a + b ( Y − T )
      • Expenditures by foreign residents on the product produced and sold by the domestic firms.
      • It depend greatly on the income level of the foreign residents and the exchange rate between domestic currency and the currency of the foreign residents.
      • Domestic income, Y, has no effect on real exports. The export schedule hence is a horizontal line too.
    • Equilibrium
      • occurs when there is no tendency for change.
      • In the macroeconomic goods market, equilibrium occurs when planned aggregate expenditure is equal to aggregate output.
  • Planned aggregate < output Keynesian cross Planned aggregate > output
  • Y > C + I aggregate output > planned aggregate expenditure inventory investment is greater than planned actual investment is greater than planned investment Disequilibria: C + I > Y planned aggregate expenditure > aggregate output inventory investment is smaller than planned actual investment is less than planned investment aggregate output: Y planned aggregate expenditure: AE = C + I equilibrium: Y = AE , or Y = C + I
  • By substituting (2) and (3) into (1) we get: There is only one value of Y for which this statement is true. We can find it by rearranging terms: (1) (2) (3)
  • Calculate the equilibrium level of national income Consumption (C) 0.5Yd Net investment (I) 100 Government spending (G) 200 Income Tax (T) 20
  • Calculate the equilibrium level of national income Consumption (C) 0.5Yd Net investment (I) 100 Government spending (G) 200 Export (X) 50 Import (M) 0.35Y Income Tax (T) 0.2Y
    • Multiplier
      • The ratio of the change in the equilibrium level of output to a change in some autonomous variable .
        • Autonomous variable -> a variable that is assumed not to depend on the state of the economy—that is, it does not change when the economy changes.
        • For example: planned investment, government expenditure and net export.
        • The multiplier of autonomous investment describes the impact of an initial increase in planned investment on production, income, consumption spending, and equilibrium income.
    • The size of the multiplier depends on the slope of the planned aggregate expenditure line.
    • The marginal propensity to save may be expressed as:
    or
    • After an increase in planned investment, equilibrium output is four times the amount of the increase in planned investment.
    Multiplier ???
  • THANK YOU