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AGGREGATE EXPENDITURES

AGGREGATE EXPENDITURES. Frederick University 20 14. Aggregate Demand ( AD). AD – the quantity of GDP, which the economic agents are planning to buy at every price level, ceteris paribus ( Y = const). Aggregate Expenditures.

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AGGREGATE EXPENDITURES

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  1. AGGREGATE EXPENDITURES Frederick University 2014

  2. Aggregate Demand (AD) AD – the quantity of GDP, which the economic agents are planning to buy at every price level,ceteris paribus (Y = const)

  3. Aggregate Expenditures • АЕ – the expenditures that economic decision makers are planning to make at every level of income, ceteris paribus • Planned Spending • Real GDP = NominalGDP • AE = C + I + G + X - M

  4. Consumption Spending (С) • С – the expenditures that households are planning to make at every level of income, ceteris paribus

  5. Consumption Spending (С)

  6. Consumption Spending (С) • 500 – consumption spending which does not depend on income, autonomous consumption – С0(Ca, a)

  7. Consumption Spending (С)

  8. Consumption Spending (С) • C = C0 + (Δ C /ΔY) x Y • Δ C /ΔY – the increase in consumption spending, caused by the increase in income – marginal propensity to consume – MPC (mpc, b) • C = C0 + MPC x Y

  9. Consumption Spending (С) • C = C0 + MPC x Y • MPC = ¾ = 0,75 • If income rises by$100,households increase their consumption spending by $75 and increase their savings by $25 • If income rises by $500, С risesby 5 х $75 = $375 • C = 500 + 375 = 500 + 0.75 x 500

  10. Savings(S) • Marginal propensity to save – the increase in savings, caused by the increase in income: • MPS = Δ S /ΔY • If income rises by$100, and households raise their consumption spending by $75, savings increase by$25 • MPC + MPS = 1 • C + S = Y • S = Y – C = Y – (C0 + MPC x Y) = Y - C0 - MPC x Y = - C0 + Y - MPC x Y = - C0 + Y(1 - MPC) • S = - C0 + MPS x Y

  11. Consumption Spending (С) and Savings (S)

  12. Consumption Spending (С) and Savings (S) • Y = 1000 • C = 500 + 0.75 x 1000

  13. Consumption Spending (С) and Savings (S)

  14. Consumption Spending (С) D 2000 C C = 500 + 0.75Y B 875 375 500 A 500 450 0 Y 2000 500

  15. Factors determining C • Households’ income • Indirect taxation • Propensity to buy imported goods and services • Direct taxation • Consumers’ expectations • Availability of consumer credit • Income distribution • Living standards • Efficiency of market institutions

  16. Investment spending I = Gross Private Domestic Investment • I – Depreciation = Net Investment • Net investment = Purchases of New Equipment + Change in Inventories • Fixed Investment = Depreciation + Purchases of New Equipment • Net Fixed Investment = Purchases of New Equipment • Inventories = • Raw Material • + Unfinished Production • + Finished Goods

  17. Factors determining Investment Spending (I) • Interest rate (i) • Expected future profits (π) • Risk • Excess capacity • Capital-output ratio (α) • Technological changes • Cost of production • Competitiveness of markets • Depreciation policies • Efficiency of market institutions

  18. AE D 2000 C AE = C + I + G + X - M C B 875 375 500 A 500 450 0 Y 2000 500

  19. AE

  20. Leakages imports М Injections exports Х Government purchases G taxes Т Expenditures on final goods and services AE Investment І Final goods and services savings S Macroeconomic Equilibrium I + G + X = S + T + M (I - S) = (T - G) + (M - X) HOUSEHOLDS FIRMS Production factors Primary Income The Circular Flow

  21. Macroeconomic Equilibrium • Y < AE • Reduction of inventories • Y • Y = AE • Y > AE • Increase in inventories • Y • Y = AE

  22. The simple multiplier • Y 2005 = C2005 + Inj2005 • Y2004 = C2004 + Inj2004 • Δ Y = ΔC + ΔInj • ΔY = C0 2005 +MPCY2005 – C02004 – MPCY2004 + ΔInj • ΔY = MPC ΔY + ΔInj • ΔY - MPC ΔY = ΔInj • ΔY (1-MPC) = ΔInj • ΔY = Δ Inj x1/(1-MPC) • 1/(1-MPC) = multiplier = К • If МРС = 0.5, К = 2 • If МРС = 0.75, К = 4

  23. The complete multiplier 1 K = MPS + t x MPC + MPI

  24. Multiplier Constraints • Factors of production bottlenecks • Limited productive capacity • Institutions

  25. Deriving the Complete Multiplier • Y 2005 = C2005 + (I + G + X)2005 - M2005 • Y2004 = C2004 + (I + G + X)2004 - M2004 • Δ Y = ΔC + ΔInj - ΔM • ΔY = C0 2005 +MPC x (Y2005 – t x Y2005) - C02004 – MPC x (Y2004 – t x Y2004)+ ΔInj - M0 2005 – MPI x (Y2005 – t x Y2005) - M02004 – MPI x (Y2004 – t x Y2004) + ΔInj • ΔY = MPC x Y2005 ( 1– t x) – MPC x Y2004 ( 1 - t) - MPI x Y2005 ( 1– t) – MPI x Y2004 (1– t) • ΔY = MPC ( 1 - t) x ΔY – MPI x ΔY + ΔInj • ΔY - MPC ( 1 - t) ΔY + MPI x ΔY = ΔInj • ΔY [(1-MPC + MPC x t) + MPI] = ΔInj • ΔY = Δ Inj :1/(1-MPC + MPC x t + MPI) • K = 1/(1-MPC + MPC x t + MPI) = 1/ (MPS + MPT + MPI)

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