PowerPoint Slides prepared by:Andreea CHIRITESCUEastern Illinois University1© 2012 Cengage Learning. All Rights Reserved. ...
Aggregate Demand• Aggregate demand–Total amount that all• Consumers• Business firms• Government agencies• Foreigners–Spend...
Aggregate Demand• Components of aggregate demand–Consumer expenditure (C, consumption)–Investment spending (I)–Government ...
Aggregate Demand• C - Consumer expenditure / consumption–Total amount spent by consumers–On newly produced goods and servi...
Aggregate Demand• I - Investment spending–Sum of expenditures of business firms• On new plant, equipment, and software–And...
Aggregate Demand• G - Government purchases–All the goods and services purchased byall levels of government• X-IM - Net exp...
National Income• National income–Sum of the incomes–That all individuals in the economy earn• In the forms of wages, inter...
National Income• Disposable income (DI)–Sum of the incomes of all individuals inthe economy–After all taxes have been dedu...
National Income• Transfer payments–Sums of money–That the government gives certainindividuals as outright grants• Rather t...
Circular Flow• Disposable income, DI = C+S–Consumption (C)–Savings (S)• “Leakages”–S, IM, Taxes• “Injections”–I, G, X, Tra...
Figure 1The Circular Flow of Expenditures and Income11© 2012 Cengage Learning. All Rights Reserved. May not be copied, sca...
Circular Flow• Aggregate demand= C+I+G+(X-IM)= Gross national income• National income= Domestic product• DI=GDP - Taxes + ...
Consumer Spending and Income• Consumer spending - responds–Change in income taxes• If DI increases–C – increases• If DI de...
Figure 2Consumer Spending and Disposable Income14© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned,...
Consumer Spending and Income• Scatter diagram – graph–Graph showing the relationship betweentwo variables–Each year: a poi...
Figure 3Scatter Diagram of Consumer Spending and DisposableIncome16© 2012 Cengage Learning. All Rights Reserved. May not b...
Figure 4Scatter Diagram of Consumer Spending and DisposableIncome, 1947–196317© 2012 Cengage Learning. All Rights Reserved...
The C Function and the MPC• Consumption function, C–Relationship between• Total consumer expenditures• Total disposable in...
The C Function and the MPC• Marginal propensity to consume (MPC)–Ratio of changes in consumption tochanges in disposable i...
The C Function and the MPC• To estimate the initial effect of a tax cuton consumer spending–Estimate the MPC–Multiply the ...
Table 1Consumption and Income in a Hypothetical Economy21© 2012 Cengage Learning. All Rights Reserved. May not be copied, ...
Figure 5A Consumption Function22C2,7003,0003,3003,6003,900RealConsumerSpending,C$4,2003,200 3,600 4,0000 4,400 4,800Real D...
Factors that Shift the C Function• Movement along a given C function–Change in disposable income• Shift of the C function–...
Figure 6Shifts of the Consumption Function24C0RealConsumerSpendingReal Disposable IncomeAC2C1Movements alongconsumption fu...
Factors that Shift the C Function• Wealth–Stock market wealth• Higher stock prices – increase in C function–Houses• Lower ...
Factors that Shift the C Function• Real interest rate–Interest rates have negligible effects onconsumption decisions• Futu...
Table 2Incomes of Three Consumers27© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated...
The Extreme Variability of I• Investment spending (I)–The most volatile component ofaggregate demand• Business investment ...
The Extreme Variability of I• Investment in housing – influenced by–Consumer incomes–Interest rates–Interest rates on home...
Determinants of Net Exports• Exports, X–Foreign purchases of U.S. goods• Imports, IM–Portion of domestic demand that issat...
Determinants of Net Exports• Changes in national income–Our GDP rises• Our imports rise–Our GDP falls• Our imports fall–Ou...
Determinants of Net Exports• Relative prices and exchange rates–Prices increase• Net exports decrease–Prices decline• Net ...
How Predictable is AD?• Aggregate demand – difficult to predict–Consumption• Wealth, stock market• Future prices, income t...
AppendixNational income accounting• National income accounting–System of measurement devised forcollecting and expressing ...
AppendixGDP – exceptions to the rule• Government output–Valued at cost of inputs• Inventories–Counted in GDP• Investment g...
AppendixGDP: sum of final goods and services• Y = C + I + G + (X – IM)• I = Gross private domestic investment–Business inv...
AppendixGDP: sum of final goods and services• Y = C + I + G + (X – IM)• G = Government purchases–Current goods and service...
AppendixGDP: sum of final goods and services• Nation’s total outputY=C+I+G+(X-IM)–Shares of GDP used up by• Consumers (C)•...
Table 3Gross Domestic Product in 2009 as the Sum of FinalDemands39© 2012 Cengage Learning. All Rights Reserved. May not be...
AppendixGDP: sum of all factor payments• GDP = National income–Add up all income in the economy–GDP = Wages + Interest + R...
Table 4Gross Domestic Product in 2009 as the Sum of Incomes41© 2012 Cengage Learning. All Rights Reserved. May not be copi...
AppendixGDP: sum of all factor payments• Net national product (NNP)–A measure of production–Is conceptually identical to n...
AppendixGDP: sum of value added• Value added by a firm–Revenue from selling a product–Minus amount paid for goods and serv...
Table 5An Illustration of Final and Intermediate Goods44© 2012 Cengage Learning. All Rights Reserved. May not be copied, s...
Table 6An Illustration of Value Added45© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplic...
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Chapter 25 aggregate demand and the powerful consumer

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Chapter 25 aggregate demand and the powerful consumer

  1. 1. PowerPoint Slides prepared by:Andreea CHIRITESCUEastern Illinois University1© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Aggregate Demand and thePowerful ConsumerMen are disposed, as a rule and on the average, toincrease their consumption as their income increases,but not by as much as the increase in their income.JOHN MAYNARD KEYNES
  2. 2. Aggregate Demand• Aggregate demand–Total amount that all• Consumers• Business firms• Government agencies• Foreigners–Spend on final goods and services–Is a schedule, not a fixed number• The numerical value depends on the pricelevel2© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  3. 3. Aggregate Demand• Components of aggregate demand–Consumer expenditure (C, consumption)–Investment spending (I)–Government purchases (G)–Net exports (X-IM)3© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  4. 4. Aggregate Demand• C - Consumer expenditure / consumption–Total amount spent by consumers–On newly produced goods and services• Excluding purchases of new homes–2/3 of total spending4© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  5. 5. Aggregate Demand• I - Investment spending–Sum of expenditures of business firms• On new plant, equipment, and software–And households on new homes–Not included• Financial “investments”• Re-sales of existing physical assets5© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  6. 6. Aggregate Demand• G - Government purchases–All the goods and services purchased byall levels of government• X-IM - Net exports–Difference between exports (X) andimports (IM)• Aggregate demandC + I + G + (X-IM)6© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  7. 7. National Income• National income–Sum of the incomes–That all individuals in the economy earn• In the forms of wages, interest, rents, andprofits–Excludes government transfer payments–Is calculated before any deductions aretaken for income taxes7© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  8. 8. National Income• Disposable income (DI)–Sum of the incomes of all individuals inthe economy–After all taxes have been deducted and alltransfer payments have been added–How much consumers have available tospend and save8© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  9. 9. National Income• Transfer payments–Sums of money–That the government gives certainindividuals as outright grants• Rather than as payments for servicesrendered to employers–Examples• Social Security and unemployment benefits9© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  10. 10. Circular Flow• Disposable income, DI = C+S–Consumption (C)–Savings (S)• “Leakages”–S, IM, Taxes• “Injections”–I, G, X, Transfers10© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  11. 11. Figure 1The Circular Flow of Expenditures and Income11© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  12. 12. Circular Flow• Aggregate demand= C+I+G+(X-IM)= Gross national income• National income= Domestic product• DI=GDP - Taxes + Transfer Payments=GDP - (Taxes – Transfers)=Y - T12© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  13. 13. Consumer Spending and Income• Consumer spending - responds–Change in income taxes• If DI increases–C – increases• If DI decreases–C – falls13changeHorizontalchangeVerticalSlope =© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  14. 14. Figure 2Consumer Spending and Disposable Income14© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  15. 15. Consumer Spending and Income• Scatter diagram – graph–Graph showing the relationship betweentwo variables–Each year: a point in the diagram• Coordinates of each year’s point: values ofthe two variables in that year15© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  16. 16. Figure 3Scatter Diagram of Consumer Spending and DisposableIncome16© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  17. 17. Figure 4Scatter Diagram of Consumer Spending and DisposableIncome, 1947–196317© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  18. 18. The C Function and the MPC• Consumption function, C–Relationship between• Total consumer expenditures• Total disposable income in the economy–Holding all other determinants ofconsumer spending constant18© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  19. 19. The C Function and the MPC• Marginal propensity to consume (MPC)–Ratio of changes in consumption tochanges in disposable income–Slope of consumption function–How much more consumers will spend ifDI rises by $119© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.CinchangetheproducesthatDIinChangeCinChange=MPC
  20. 20. The C Function and the MPC• To estimate the initial effect of a tax cuton consumer spending–Estimate the MPC–Multiply the amount of the tax cut by theestimated MPC–Prediction – subject to some margin oferror20© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  21. 21. Table 1Consumption and Income in a Hypothetical Economy21© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  22. 22. Figure 5A Consumption Function22C2,7003,0003,3003,6003,900RealConsumerSpending,C$4,2003,200 3,600 4,0000 4,400 4,800Real Disposable Income, DI5,200© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  23. 23. Factors that Shift the C Function• Movement along a given C function–Change in disposable income• Shift of the C function–Change in other determinants of C• Wealth• Price level• Real interest rate• Future income expectations23© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  24. 24. Figure 6Shifts of the Consumption Function24C0RealConsumerSpendingReal Disposable IncomeAC2C1Movements alongconsumption functionShifts of consumptionfunction© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  25. 25. Factors that Shift the C Function• Wealth–Stock market wealth• Higher stock prices – increase in C function–Houses• Lower price of houses – fall in C function• Price level–Higher price level – lower purchasingpower of money-fixed assets25© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  26. 26. Factors that Shift the C Function• Real interest rate–Interest rates have negligible effects onconsumption decisions• Future income expectations–Permanent cuts in income taxes causegreater increases in consumer spending• Than do temporary cuts of equal magnitude26© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  27. 27. Table 2Incomes of Three Consumers27© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  28. 28. The Extreme Variability of I• Investment spending (I)–The most volatile component ofaggregate demand• Business investment – influenced by–Interest rates–Tax provisions–Technical change–Strength of economy–State of business confidence28© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  29. 29. The Extreme Variability of I• Investment in housing – influenced by–Consumer incomes–Interest rates–Interest rates on home mortgages–Expected rate of price appreciation (ordepreciation)29© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  30. 30. Determinants of Net Exports• Exports, X–Foreign purchases of U.S. goods• Imports, IM–Portion of domestic demand that issatisfied by foreign producers• Net exports–Exports minus Imports30© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  31. 31. Determinants of Net Exports• Changes in national income–Our GDP rises• Our imports rise–Our GDP falls• Our imports fall–Our exports• Relatively insensitive to our GDP• Sensitive to the GDPs of other countries31© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  32. 32. Determinants of Net Exports• Relative prices and exchange rates–Prices increase• Net exports decrease–Prices decline• Net exports increase–Foreign prices increase• Net exports increase–Foreign prices decrease• Net exports decrease32© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  33. 33. How Predictable is AD?• Aggregate demand – difficult to predict–Consumption• Wealth, stock market• Future prices, income tax law–Investment• Business confidence, expectations–Government purchases• Politics, military and national security events–Net exports• Development abroad33© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  34. 34. AppendixNational income accounting• National income accounting–System of measurement devised forcollecting and expressing macroeconomicdata• Gross domestic product (GDP)–Sum of money values–All final goods and services–Produced over a specified period of time• Usually one year34© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  35. 35. AppendixGDP – exceptions to the rule• Government output–Valued at cost of inputs• Inventories–Counted in GDP• Investment goods–Intermediate goods–Included in GDP35© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  36. 36. AppendixGDP: sum of final goods and services• Y = C + I + G + (X – IM)• I = Gross private domestic investment–Business investment–Residential construction–Inventory investment–Includes only newly produced capitalgoods–Doesn’t include exchanges of existingassets36© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  37. 37. AppendixGDP: sum of final goods and services• Y = C + I + G + (X – IM)• G = Government purchases–Current goods and services–Purchased by all levels of government–Don’t include transfer payments37© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  38. 38. AppendixGDP: sum of final goods and services• Nation’s total outputY=C+I+G+(X-IM)–Shares of GDP used up by• Consumers (C)• Investors (I)• Government (G)• Foreigners (X-IM)38© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  39. 39. Table 3Gross Domestic Product in 2009 as the Sum of FinalDemands39© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  40. 40. AppendixGDP: sum of all factor payments• GDP = National income–Add up all income in the economy–GDP = Wages + Interest + Rents + Profits–Includes indirect business taxes–Excludes transfer payments–No deduction for income taxes40© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  41. 41. Table 4Gross Domestic Product in 2009 as the Sum of Incomes41© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  42. 42. AppendixGDP: sum of all factor payments• Net national product (NNP)–A measure of production–Is conceptually identical to nationalincome• Gross national product (GNP)–NNP plus depreciation• Depreciation–Portion of capital equipment used up42© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  43. 43. AppendixGDP: sum of value added• Value added by a firm–Revenue from selling a product–Minus amount paid for goods and servicespurchased from other firms• GDP = sum of values added by all firms• Value added= Wages + Interest + Rents + Profits43© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  44. 44. Table 5An Illustration of Final and Intermediate Goods44© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  45. 45. Table 6An Illustration of Value Added45© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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