Aggregate spending _saving__and_consumpt

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Aggregate spending _saving__and_consumpt

  1. 1. 9 - 1Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShowBuilding theAggregate ExpendituresModel9C H A P T E R
  2. 2. 9 - 2Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShowPRIVATE CLOSED ECONOMYSimplifications...• A Closed Economy• Defer Government & Taxes• Defer Exports and Imports• All Saving Is Personal• Net Income Abroad Is Zero•Aggregate Spending =Consumption and Investment
  3. 3. 9 - 3Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShowSaving (S) = Disposable Income (DI) -Consumption (C)Households consume most oftheir disposable incomeConsumption & saving aredirectly related to incomeConsumption ScheduleSaving ScheduleBreakeven IncomeCONSUMPTION AND SAVING
  4. 4. 9 - 4Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShowConsumptionSavingoo45oCSConsumptionscheduleSavingscheduleCSDisposable IncomeDisposable IncomeSAVINGSAVINGDISSAVINGDISSAVINGMPC = Slope of CMPS = Slope of SMPC + MPS = 1CONSUMPTION AND SAVING
  5. 5. 9 - 5Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShowCONSUMPTION AND SAVINGAPCConsumption / Disposable IncomeAPSSaving / Disposable IncomeMPSChange in SavingChange in Disposable IncomeMPCChange in ConsumptionChange in Disposable Income
  6. 6. 9 - 6Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShow.80 .85 .90 .95 1.0.986.976.972.940.907.873.869.842CanadaUnited StatesNetherlandsUnited KingdomGermanyItalyJapanFranceGLOBAL PERSPECTIVEAverage Propensities to Consume,Selected Nations, 1999Statistical Abstract of the United States, 2000
  7. 7. 9 - 7Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShowNONINCOME DETERMINANTSOF CONSUMPTION AND SAVING• Wealth• Wealth Effects• Expectations• Taxation• Household Debt
  8. 8. 9 - 8Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShow• Terminology• Schedule Shifts• StabilityGraphically…TERMINOLOGY, SHIFTS, & STABILITY
  9. 9. 9 - 9Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShowConsumptionSavingoo45oC0S0Disposable IncomeDisposable IncomeC1S1TERMINOLOGY, SHIFTS, & STABILITYIncreases inConsumptionMeans…A DecreaseIn Saving
  10. 10. 9 - 10Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShowConsumptionSavingoo45oC0S0Disposable IncomeDisposable IncomeC2S2TERMINOLOGY, SHIFTS, & STABILITYDecreases inConsumptionMeans…An IncreaseIn Saving
  11. 11. 9 - 11Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShowExpected Rate of Return, rReal Interest Rate, iInverse relationship betweenInvestment demand and theexpected rate of returnINVESTMENTGraphically presented...
  12. 12. 9 - 12Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShow Investment (billions of dollars)Expectedrateofreturn,r,andinterestrate,i(percents)1614121086420INVESTMENTDEMANDCURVE5 10 15 20 25 30 35 40INVESTMENTI D
  13. 13. 9 - 13Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShow•Acquisition, Maintenance,and Operating Costs•Business Taxes•Technological Change•Stock of Capital Goods onHand•ExpectationsSHIFTS IN INVESTMENT DEMAND
  14. 14. 9 - 14Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShowGLOBAL PERSPECTIVEGross Investment Expenditures as aPercentage of GDP, Selected Nations40%30%20%10%0%Germany FranceUnitedStatesCanadaMexico UnitedKingdomSwedenJapan SouthKoreaSource: World Bank
  15. 15. 9 - 15Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShowINVESTMENT DEMAND & SCHEDULEExpectedrateofreturn,r,andrealinterestrate,i(percents)Investment(billionsofdollars)Investment(billions of dollars)20820Real Domestic Product, GDP(billions of dollars)I DIgInvestmentDemandCurveInvestmentSchedule2020
  16. 16. 9 - 16Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShow•Durability of Capital andVariability of Expectations•Irregularity of Innovation•Volatility of InvestmentINSTABILITY OF INVESTMENT
  17. 17. 9 - 17Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShowEQUILIBRIUM GDPGDP = C + IgReal Domestic OutputAggregate Expenditures ScheduleEquilibrium GDPSaving and Planned Investment areEqual•Leakage•InjectionNo Unplanned Changes inInventoriesActual Investment
  18. 18. 9 - 18Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShowPrivatespending,C+Ig(billionsofdollars)o45oCC + IgIg = $20 BillionEquilibriumReal domestic product, GDP (billions of dollars)370 390 410 430 450 470 490 510 530 550(C + I g = GDP)EQUILIBRIUM GDPC =$450 Billion$530510490470450430410390370
  19. 19. 9 - 19Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShowPrivatespending,C+Ig(billionsofdollars)o45oCC + IgIg = $20 BillionEquilibriumReal domestic product, GDP (billions of dollars)370 390 410 430 450 470 490 510 530 550(C + I g = GDP)EQUILIBRIUM GDPC =$450 Billion$530510490470450430410390370Say’s Law
  20. 20. 9 - 20Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShowPrivatespending,C+Ig(billionsofdollars)o45oCC + IgIg = $20 BillionEquilibriumReal domestic product, GDP (billions of dollars)370 390 410 430 450 470 490 510 530 550(C + I g = GDP)EQUILIBRIUM GDPC =$450 Billion$530510490470450430410390370ChapterConclusions
  21. 21. • consumption schedule• saving schedule• break-even income• average propensity to consume (APC)• average propensity to save (APS)• marginal propensity to consume (MPC)• marginal propensity to save (MPS)• wealth effect• expected rate of return• real interest rate• investment demand curve• planned investment• investment schedule• aggregate expendituresschedule• equilibrium GDP• 45 degree line• leakage• injection• unplanned changes ininventories• actual investmentCopyright McGraw-Hill/Irwin, 2002ENDBACK
  22. 22. 9 - 22Copyright McGraw-Hill/Irwin, 2002Private Closed EconomyConsumption and SavingNonincome Determinants of Consumption and SavingTerminology, Shifts, and StabilityInvestmentShifts in Investment DemandInvestment Demand and ScheduleInstability of InvestmentEquilibrium GDPKey TermsPreviousSlideNextSlideEndShowNext...Aggregate ExpendituresThe Multiplier, Net Exports,and GovernmentChapter 10

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