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Product Markets and National Output

Product Markets and National Output. Chapter 12. Discussion Topics. Circular flow of payments Composition and measurement of gross domestic product Consumption, saving and investment Equilibrium national income and output. Circular Flow Diagram for General Economy. We can measure macro

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Product Markets and National Output

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  1. Product Markets and National Output Chapter 12

  2. Discussion Topics • Circular flow of payments • Composition and measurement of gross domestic product • Consumption, saving and investment • Equilibrium national income and output

  3. Circular Flow DiagramforGeneral Economy

  4. We can measure macro economic activity in either resource markets or product markets. Result is the same… Page 277

  5. Four major sectors In this economy… Page 277

  6. Businesses are net borrowers in financial markets while households are net savers… Page 277

  7. Government receives net inflows of taxes from businesses and households and is a net borrower in financial markets… Page 277

  8. Businesses make investment expenditures, Governments makes expenditures, and Households make consumption expenditures Page 277

  9. Businesses receive funds from total expenditures in product markets while households, who own businesses, receive wages, rents, interest and business in resource markets profits where they provide labor and capital services… Page 277

  10. Measurement ofGross Domestic Product

  11. Everything below zero represents a recession Page 279

  12. GDP = C + I + G + (X – M)

  13. GDP = C + I + G + (X – M)

  14. GDP = C + I + G + (X – M)

  15. GDP = C + I + G + (X – M)

  16. What’s in GDP?

  17. Types of consumer expenditures… Page 279

  18. Types of investment expenditures… Page 279

  19. Calculation of net exports… Page 279

  20. Types of government Expenditures… Page 279

  21. Items not included in GDP… Page 279

  22. Understanding the Domestic Determinants of GDPC, I, G

  23. Planned Consumption Function The slope of the consumption function is the marginal propensity to consume (MPC), or C÷YD where YD represents disposable income. Autonomous or fixed consumption Page 281

  24. Planned Consumption Function The consumption function in this graph can be expressed graphically as shown below. C = AC + MPC(DPI) Page 281

  25. Planned Consumption Function Consumer expenditures would be $3,600 if disposable income was equal to $3,000. Consumers would be dis-saving by $600. C = $1,500 + .70($3,000) = $3,600 Page 281

  26. Planned Consumption Function An increase in dis- posable income to $4,000 would raise expenditures to $4,300. Dis-saving would fall to $300. C = $1,500 + .70($4,000) = $4,300 Page 281

  27. Planned Consumption Function An increase in dis- posable income to $5,000 would raise expenditures to $5,000. Dis-saving would fall to zero. C = $1,500 + .70($5,000) = $5,000 Page 281

  28. Savings vs. Consumption We said that the slope of the consumption function was the marginal propensity to consume, or: MPC = C ÷ DPI Savings is defined as S = DPI – C And, therefore, the marginal propensity to save is MPS = 1.0 – MPC Page 282 and 284

  29. When the savings rate rises significantly, a recession is often near.

  30. Planned Consumption Function A role for fiscal policy here: A cut in the tax rate increases consump- tion. An increase in the tax rate decreases consumption. Page 281

  31. Planned Consumption Function A role for fiscal policy here: A cut in the tax rate increases consump- tion. An increase in the tax rate decreases consumption. Page 281

  32. Real Wealth Effect Suppose stock market prices rose, increasing real wealth of consumers by $700. Page 283

  33. Real Wealth Effect This would increase the intercept by $700, Page 283

  34. Real Wealth Effect This shifts the curve upward for given income level, boosts consumer spending to $5,000. This raises dis-saving to $1,000, raises debt relative to income, and can be inflationary….. C = $2,200 + .70($4,000) = $5,000 Page 283

  35. Planned Investment Function Level of autonomous investment spending I = AI – MEI(i) Page 287

  36. Planned Investment Function The slope of the investment function is the marginal efficiency of investment, or: MEI = I÷i I = AI – MEI(i) Page 287

  37. Planned Investment Function Level of investment expenditures would be $250 at an interest rate of 9 percent if MEI = 25. I = $475 – 25(9.0) Page 287

  38. Planned Investment Function Should interest rates fall to 7% as a result of events in the money market, investment expenditures would increase from $250 to $300. I = $475 – 25(7.0) Page 287

  39. Effects of Profit Expectations An increase in profit expectations would cause businesses to expand their planned investment expenditures by $50 at the same interest rate I = $525 – 25(7.0) Page 288

  40. Understanding Product MarketEquilibrium

  41. Aggregate Expenditures Consumption expenditures function: C = $1,500+0.70(DPI) Page 289

  42. Aggregate Expenditures Consumption expenditures function: C = $1,500+0.70(DPI) Investment expenditures function: I = $475 –25(i) Page 289

  43. Aggregate Expenditures Consumption expenditures function: C = $1,500+0.70(DPI) Investment expenditures function: I = $475 –25(i) Government expenditures function: G = $880 Page 289

  44. Aggregate Expenditures Consumption expenditures function: C = $1,500+0.70(DPI) Investment expenditures function: I = $475 –25(i) Government expenditures function: G = $880 If the interest rate (i) is equal to 7%, then AE = $1,500 + 0.70(DPI) + $475 – 25(7) +$880 = $2,680 + 0.70(DPI) Page 289

  45. Aggregate Expenditures Aggregate expenditures equation: AE = $2,680+0.70(NI-Tax) Page 289

  46. Aggregate Expenditures Aggregate expenditures equation: AE = $2,680+0.70(NI-Tax) where national output equals national income (NI) and Tax is based upon last year’s income (Tax = $400). Page 289

  47. Aggregate Expenditures Aggregate expenditures equation: AE = $2,680+0.70(NI-Tax) where national output equals national income (NI) and Tax is based upon last year’s income (Tax = $400). If national income is $6,000, then AE = $2,680+0.70($6,000 - $400) = $6,600 which represents the first line in Table 12.4 Page 289

  48. Aggregate Expenditures Aggregate expenditures equation: AE = $2,680+0.70(NI-Tax) where national output equals national income (NI) and Tax is based upon last year’s income (Tax = $400). If national income is $6,000, then AE = $2,680+0.70($6,000 - $400) = $6,600 which represents the first line in Table 12.4 Repeating this for other levels of income gives us the graph on page 290 Page 289

  49. Aggregate Expenditures Curve Total autonomous domestic spending… Page 290

  50. Aggregate Expenditures Curve Point where spending equals output… Page 290

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