Bài giảng Macro - Chapter 8 Building the Aggregate Expenditure Model

Building the Aggregate Expenditure ModelChapter 8SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGEIn this chapter you will learnThe factors that determine consumption expenditure and savingThe factors that determine investment spendingHow equilibrium GDP is determined in a closed economy without a government sectorAbout the effects of the multiplier on changes in equilibrium GDPIn this chapter you will learnHow international trade affects equilibrium outputHow adding the public sector affects equilibrium outputThe distinction between equilibrium and full-employment GDPThe limitations of the aggregate expenditure modelChapter 8 TopicsSimplificationsTools of the Aggregate Expenditures ModelConsumption & SavingInvestmentEquilibrium GDPOther Features of Equilibrium GDPChanges in Equilibrium GDP & the MultiplierInternational Trade & Equilibrium OutputAdding the Public SectorEquilibrium vs Full-Employment GDPSimplificationsA private closed economyNo governmentNo taxesNo exports or importsAll saving is personalDepreciation is zeroGDP=NDI=PI=DIChapter 8 TopicsSimplificationsTools of the Aggregate Expenditures ModelConsumption & SavingInvestmentEquilibrium GDPOther Features of Equilibrium GDPChanges in Equilibrium GDP & the MultiplierInternational Trade & Equilibrium OutputAdding the Public SectorEquilibrium vs Full-Employment GDPTools of the AE Modelthe amount of goods & services produced & therefore the level of employment depend directly on the level of aggregate expenditures (total spending)assume excess production capacity & unemployed labourprice level is constantChapter 8 TopicsSimplificationsTools of the Aggregate Expenditures ModelConsumption & SavingInvestmentEquilibrium GDPOther Features of Equilibrium GDPChanges in Equilibrium GDP & the MultiplierInternational Trade & Equilibrium OutputAdding the Public SectorEquilibrium vs Full-Employment GDPConsumption & SavingThe Consumption Schedulehigher income  higher consumptionThe Saving Schedulehigher income  higher savingS = DI - CConsumption & SavingAPC=consumptionincomeAPS=savingincomeMPC=change in consumptionchange in incomeMPS=change in savingchange in incomeAPC + APS = 1MPC + MPS = 1(1)GDP(=DI)(2)C(3)S(1)-(2)(4)APC(2)/(1)(5)APS(3)/(1)(6)MPC(2)/(1)(7)MPS(3)/(1)370375390390410405430420450435470450490465510480530495370 - 375 = -5- 505101520253035375/370 = 1.011.011.00.99.98.97.96.95.94.93-5/370 = -.01-.01.00.01.02.03.04.05.06.0715/20= .75.75.75.75.75.75.75.75.75.755/20 = .25.25.25.25.25.25.25.25.25.25Table 8-1Graphically presented....ConsumptionSaving45oCSConsumptionscheduleSavingscheduleDisposable IncomeDisposable IncomeSAVINGSAVINGDISSAVINGDISSAVINGMPC = Slope of CMPS = Slope of S390© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 812Figure 8-2Nonincome Determinants of Consumption & SavingWealthExpectationsTaxationHousehold Debt45oCSSchedule Shifts390© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 814ConsumptionSavingDisposable IncomeDisposable IncomeFigure 8-445oCC1Anincrease inconsumption...390© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 815ConsumptionSavingDisposable IncomeDisposable IncomeSchedule ShiftsFigure 8-4S45oCSC1Anincrease inconsumption...S1A decreasein saving© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 816ConsumptionSavingDisposable IncomeDisposable IncomeSchedule ShiftsFigure 8-445oCC2Adecrease inconsumption...© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 817ConsumptionSavingDisposable IncomeDisposable IncomeSchedule ShiftsFigure 8-4S45oCSC2Adecrease inconsumption...S2Anincreasein saving© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 818ConsumptionSavingDisposable IncomeDisposable IncomeSchedule ShiftsFigure 8-4schedules are relatively stableChapter 8 TopicsSimplificationsTools of the Aggregate Expenditures ModelConsumption & SavingInvestmentEquilibrium GDPOther Features of Equilibrium GDPChanges in Equilibrium GDP & the MultiplierInternational Trade & Equilibrium OutputAdding the Public SectorEquilibrium vs Full-Employment GDPInvestmentExpected Rate of Return, rThe Real Interest Ratei = nominal rate - rate of inflationInvestment Demand CurveInvestment (billions of dollars)Expected rate of net profit, r,and interest rate, i (percent)16141210 8 6 4 2 0Investmentdemand curve5 10 15 20 25 30 35 40IDFigure 8-5Shifts in the ID CurveAcquisition, Maintenance & Operating CostsBusiness TaxesTechnological ChangeStock of Capital Goods on HandExpectationsInvestment Schedulethe relationship between investment & GDP (DI)assume planned investment is independent of the level of current disposable income or real outputInvestment (billions of dollars)Expected rate of net profit, r,and interest rate, i (percent)16141210 8 6 4 2 0Investmentdemand curve5 10 15 20 25 30 35 40IDFigure 8-7aGDP (billions of dollars)Investment (billions of dollars)20InvestmentscheduleFigure 8-7bIgFluctuations of InvestmentDurability of Capital & the Variability of ExpectationsChapter 8 TopicsSimplificationsTools of the Aggregate Expenditures ModelConsumption & SavingInvestmentEquilibrium GDPOther Features of Equilibrium GDPChanges in Equilibrium GDP & the MultiplierInternational Trade & Equilibrium OutputAdding the Public SectorEquilibrium vs Full-Employment GDPEquilibrium GDPThe equilibrium output is that output the production of which creates total spending just sufficient to purchase that outputNo overproductionNo draw down of inventoriesemployment (millions)GDPCS2.5370375-55.039039007.5410405510.04304201012.54504351515.04704502017.54904652520.05104803022.55304953525.055051040Table 8-4as beforeemployment (millions)GDPCSIg2.5370375-5205.03903900207.541040552010.0430420102012.5450435152015.0470450202017.5490465252020.0510480302022.5530495352025.05505104020Table 8-4Ig is $20 billion, no matter what GDP isemployment (millions)GDPCSIgAE2.5370375-5203955.03903900204107.541040552042510.0430420102044012.5450435152045515.0470450202047017.5490465252048520.0510480302050022.5530495352051525.05505104020530Table 8-4AE = C + Igemployment (millions)GDPCSIgAEunplanned inventories2.5370375-5203955.03903900204107.541040552042510.0430420102044012.5450435152045515.0470450202047017.5490465252048520.0510480302050022.5530495352051525.05505104020530Table 8-4unplannedinventory change is the difference between production & AEemployment (millions)GDPCSIgAEunplanned inventories2.5370375-520395-255.03903900204107.541040552042510.0430420102044012.5450435152045515.0470450202047017.5490465252048520.0510480302050022.5530495352051525.05505104020530Table 8-4employment (millions)GDPCSIgAEunplanned inventories2.5370375-520395-255.0390390020410-207.5410405520425-1510.04304201020440-1012.54504351520455-515.04704502020470017.54904652520485+520.05104803020500+1022.55304953520515+1525.05505104020530+20Table 8-4when inventories run down, production will increaseemployment (millions)GDPCSIgAEunplanned inventoriestendency of output2.5370375-520395-25increase5.0390390020410-207.5410405520425-1510.04304201020440-1012.54504351520455-515.04704502020470017.54904652520485+520.05104803020500+1022.55304953520515+1525.05505104020530+20Table 8-4employment (millions)GDPCSIgAEunplanned inventoriestendency of output2.5370375-520395-25increase5.0390390020410-20increase7.5410405520425-15increase10.04304201020440-10increase12.54504351520455-5increase15.047045020204700equilibrium17.54904652520485+5decrease20.05104803020500+10decrease22.55304953520515+15decrease25.05505104020530+20decreaseTable 8-4employment (millions)GDPCSIgAEunplanned inventoriestendency of output2.5370375-520395-25increase5.0390390020410-20increase7.5410405520425-15increase10.04304201020440-10increase12.54504351520455-5increase15.047045020204700equilibrium17.54904652520485+5decrease20.05104803020500+10decrease22.55304953520515+15decrease25.05505104020530+20decreaseTable 8-4Equilibrium point45oReal domestic product, GDP (billions of dollars) 370 390 410 430 450 470 490 510 530 550CAggregate Expenditure s (billions of dollars)Figure 8-8C = $450 billionIg = $20 billionC + IgAggregateexpenditures© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 838 370 390 410 430 450 470 490 510 530Chapter 8 TopicsSimplificationsTools of the Aggregate Expenditures ModelConsumption & SavingInvestmentEquilibrium GDPOther Features of Equilibrium GDPChanges in Equilibrium GDP & the MultiplierInternational Trade & Equilibrium OutputAdding the Public SectorEquilibrium vs Full-Employment GDPOther Features of Equilibrium GDPSavings equals Planned Investmentsaving represents a leakage of spendinginvestment can be thought of as an injection of spendingOther Features of Equilibrium GDPNo Unplanned Changes in Inventorieschanges in inventories are a part of investmentwhen unplanned changes in inventories are considered, investment & savings are always equal, at any level of GDPChapter 8 TopicsSimplificationsTools of the Aggregate Expenditures ModelConsumption & SavingInvestmentEquilibrium GDPOther Features of Equilibrium GDPChanges in Equilibrium GDP & the MultiplierInternational Trade & Equilibrium OutputAdding the Public SectorEquilibrium vs Full-Employment GDPChanges in Equilibrium GDP & the Multipliera $5 billion increase of investment will shift the AE schedule upwardequilibrium GDP will rise from $470 billion to $490 billion (an increase of more than $5 billion)illustratedAggregate expenditures (billions of dollars)o45oReal domestic product, GDP (billions of dollars)(C + Ig ) 0430 450 470 490 510Equilibrium GDP at Ig0 level of investment equals $470 billion470450490430Figure 8-9o45o(C + Ig ) 1Real domestic product, GDP (billions of dollars)(C + Ig ) 0430 450 470 490 510470450490430Aggregate expenditures (billions of dollars)Equilibrium GDP at Ig1 level of investment equals $490 billion+5 +20 Figure 8-9o45oReal domestic product, GDP (billions of dollars)(C + Ig ) 0430 450 470 490 510470450490430Aggregate expenditures (billions of dollars)Equilibrium GDP at Ig2 level of investment equals $450 billionFigure 8-9(C + Ig ) 2- 5-20The Multiplier EffectMultiplier =Change in real GDPInitial change in spendingChange in GDP=Multiplier xInitial changein spendingo45o(C + Ig ) 1Real domestic product, GDP (billions of dollars)(C + Ig ) 0430 450 470 490 510470450490430Aggregate expenditures (billions of dollars)+5 +20 Figure 8-9Multiplier =Change in real GDPInitial change in spendingMultiplier =+20+5=4o45o(C + Ig ) 1Real domestic product, GDP (billions of dollars)(C + Ig ) 0430 450 470 490 510470450490430Aggregate expenditures (billions of dollars)+5 +20 Figure 8-9Change in GDP=Multiplier xInitial changein spendingxChange in GDP=45=20The Multiplier Effectspending generates incomechange in income will cause both consumption & saving to change(1) income(2) C(MPC=.75)(3) S(MPS=.25)Ig increases $5$5.00$3.75$1.252nd round3rd round4th round5th roundAll other roundsTotalTable 8-5(1) income(2) C(MPC=.75)(3) S(MPS=.25)Ig increases $5$5.00$3.75$1.252nd round3.753rd round4th round5th roundAll other roundsTotalTable 8-5(1) income(2) C(MPC=.75)(3) S(MPS=.25)Ig increases $5$5.00$3.75$1.252nd round3.752.810.943rd round4th round5th roundAll other roundsTotalTable 8-5(1) income(2) C(MPC=.75)(3) S(MPS=.25)Ig increases $5$5.00$3.75$1.252nd round3.752.810.943rd round2.812.110.704th round2.111.580.535th round1.581.190.39All other rounds4.753.561.19Total$20.00$15.00$5.00Table 8-5AllotherThe MultiplierMPS & the multiplier are inversely relatedMultiplier =OR1MPS11 - MPCChapter 8 TopicsSimplificationsTools of the Aggregate Expenditures ModelConsumption & SavingInvestmentEquilibrium GDPOther Features of Equilibrium GDPChanges in Equilibrium GDP & the MultiplierInternational Trade & Equilibrium OutputAdding the Public SectorEquilibrium vs Full-Employment GDPInternational Trade & Equilibrium OutputNet Exports & Aggregate Expendituresexports (X) create domestic production, income & employmentimports (M) represent goods & services produced abroadDeterminants of Net Exportsif GDP in other countries is growing, demand for our exports will increaseour imports are dependent on our own GDPboth imports & exports are affected by the exchange ratedepreciationappreciationGDP X M Xn370 40 15 25390 40 20 20410 40 25 15430 40 30 10450 40 35 5470 40 40 0490 40 45 -5Net Export ScheduleTable 8-6Marginal Propensity to Import (MPM)= imports / GDP= 5 / 20= .25Open-Economy Multiplierspending on imports is another leakageMultiplier =1MPS+MPMGDP X M Xn370 40 15 25390 40 20 20410 40 25 15430 40 30 10450 40 35 5470 40 40 0490 40 45 -5Net Export ScheduleTable 8-6Net leakage due to international trade is zero with GDP at 470GDPCSIgXMXnAE$370$375$ - 5$20$40$15$25$420390390020402020430410405520402515440430420102040301045045043515204035546047045020204040047049046525204045- 548051048030204050- 1049053049535204055- 1550055051040204060- 20510Table 8-7© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 863The impact of net exports on equilibrium GDPEquilibrium GDP is unchangedNet Exports & Equilibrium GDPfigures chosen in the example have a neutral effect on equilibrium GDPnot necessarily the caseillustratedo45oReal domestic product, GDP (billions of dollars)C + Ig +Xn0430 450 470 490 510470450490430Aggregate expenditures (billions of dollars)Equilibrium GDP at Xn0 level of net exports equals $470 billionFigure 8-12o45oReal domestic product, GDP (billions of dollars)C + Ig+Xn0C + Ig + Xn1430 450 470 490 510470450490430Aggregate expenditures (billions of dollars)Equilibrium GDP at Xn1 level of net exports equals $490 billionFigure 8-12o45oReal domestic product, GDP (billions of dollars)C + Ig+Xn0C + Ig + Xn1430 450 470 490 510470450490430Aggregate expenditures (billions of dollars)C + Ig + Xn2Figure 8-12Equilibrium GDP at Xn2 level of net exports equals $450 billionNet Exports & Equilibrium GDPA decline in net exports decreases aggregate expenditures & reduces GDPA rise in net exports increases aggregate expenditures & increases GDPInternational Economic LinkagesProsperity AbroadTariffsExchange RatesChapter 8 TopicsSimplificationsTools of the Aggregate Expenditures ModelConsumption & SavingInvestmentEquilibrium GDPOther Features of Equilibrium GDPChanges in Equilibrium GDP & the MultiplierInternational Trade & Equilibrium OutputAdding the Public SectorEquilibrium vs Full-Employment GDPAdding the Public SectorSimplifying Assumptionslevel of investment is independent of the level of GDPgovernment purchases do not affect private spendingnet tax revenues are derived totally from personal taxestaxes do not vary with GDPprice level is constantAdding the Public Sectorincreases in public spending shift the AE schedule upward & result in higher equilibrium GDPGDPCSIgXMXnGAE$370$375$ - 5$20$40$15$25$40$4603903900204020204047041040552040251540480430420102040301040490450435152040355405004704502020404004051049046525204045- 54052051048030204050- 104053053049535204055- 154054055051040204060- 2040550Table 8-8© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 873The impact of government purchases on equilibrium GDPEquilibrium GDP has increasedo45oC + Ig + XnGDP (billions of dollars)470 510 550510550470C + Ig + Xn + GG=$40Impact of $40 billion in government purchases on equilibrium GDPAggregate expenditures (billions of dollars)Figure 8-13Taxation & Equilibrium GDPsuppose government imposes a lump-sum tax of $40 billionGDPTDICaSaIgXMaXnaGAE$370$40$330390403504104037043040390450404104704043049040450510404705304049055040510Table 8-8© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 876Equilibrium GDPDisposable income decreases because of the taxGDPTDICaSaIgXMaXnaGAE$370$40$330$345390403503604104037037543040390390450404104054704043042049040450435510404704505304049046555040510480Table 8-8© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 877Equilibrium GDPConsumption spending is lowerGDPTDICaSaIgXMaXnaGAE$370$40$330$345$ - 1539040350360- 1041040370375- 543040390390045040410405547040430420104904045043515510404704502053040490465255504051048030Table 8-8© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 878Equilibrium GDPSaving is lowerGDPTDICaSaIgXMaXnaGAE$370$40$330$345$ - 15$20$4039040350360- 10204041040370375- 52040430403903900204045040410405520404704043042010204049040450435152040510404704502020405304049046525204055040510480302040Table 8-8© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 879Equilibrium GDPInvestment & exports are unchangedGDPTDICaSaIgXMaXnaGAE$370$40$330$345$ - 15$20$40$5$3539040350360- 102040103041040370375- 520401525430403903900204020204504041040552040251547040430420102040301049040450435152040355510404704502020404005304049046525204045- 55504051048030204050- 10Table 8-8© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 880Equilibrium GDPImports are lower; net exports are higherGDPTDICaSaIgXMaXnaGAE$370$40$330$345$ - 15$20$40$5$35$4039040350360- 10204010304041040370375- 520401525404304039039002040202040450404104055204025154047040430420102040301040490404504351520403554051040470450202040400405304049046525204045- 5405504051048030204050- 1040Table 8-8© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 881Equilibrium GDPGovernment spending is unchangedGDPTDICaSaIgXMaXnaGAE$370$40$330$345$ - 15$20$40$5$35$40$44039040350360- 10204010304045041040370375- 520401525404604304039039002040202040470450404104055204025154048047040430420102040301040490490404504351520403554050051040470450202040400405105304049046525204045- 5405205504051048030204050- 1040530Table 8-8© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 882Equilibrium GDPo45oGDP (billions of dollars)510550470$40 billion lump sum personal taxesnet effect: a reduction of $20 billion in AE Aggregate expenditures (billions of dollars)Figure 8-14470 510 550C + Ig + Xn + Go45oGDP (billions of dollars)C + Ig + Xn + GCa + Ig + Xna + Gequilibrium GDP reduced by $40 billion470 510 550-20-40 Aggregate expenditures (billions of dollars)510550470Balanced Budget Multiplierequal increases in G & T increase equilibrium GDPgovernment spending has a direct impact on AEtaxes affect AE indirectly through DIthe balanced budget multiplier is 1Balanced Budget Multiplierincrease G by $40 billionincrease T by $40 billionequilibrium AE increases by $40 billionChapter 8 TopicsSimplificationsTools of the Aggregate Expenditures ModelConsumption & SavingInvestmentEquilibrium GDPOther Features of Equilibrium GDPChanges in Equilibrium GDP & the MultiplierInternational Trade & Equilibrium OutputAdding the Public SectorEquilibrium vs Full-Employment GDPEquilibrium vs Full-Employment GDPequilibrium GDP may or may not provide full employmentReal GDP (billions of dollars)o45o510 530(Ca + Ig + Xna + G)0Full Employment GDP Aggregate expenditures (billions of dollars)Figure 8-16Recessionary gap — Whenaggregate expendituresare inadequate to bringabout full employment Real GDP (billions of dollars)(Ca + Ig + Xna + G)1o45oRecessionaryGap = $20 billion (Ca + Ig + Xna + G)0510 530 Aggregate expenditures (billions of dollars)Full Employment GDP20Recessionary gap — Whenaggregate expendituresare inadequate to bringabout full employment Figure 8-16oGDP (billions of dollars)(Ca + Ig + Xna + G)0510 530 550 Aggregate expenditures (billions of dollars)Full Employment GDPInflationary gap — Whenaggregate expendituresare greater than the fullemployment level causingdemand-pull inflation Figure 8-16GDP (billions of dollars)o(Ca + Ig + Xna + G)2(Ca + Ig + Xna + G)0510 530 550 Aggregate expenditures (billions of dollars)Full Employment GDPInflationary gap — Whenaggregate expendituresare greater than the fullemployment level causingdemand-pull inflation InflationaryGap = $20 billion 20Figure 8-16Applications of the ModelThe End of the Japanese Growth “Miracle”Limitations of the ModelThe model does not show price-level changesThe model does not deal with cost-push inflationChapter 8 TopicsSimplificationsTools of the Aggregate Expenditures ModelConsumption & SavingInvestmentEquilibrium GDPOther Features of Equilibrium GDPChanges in Equilibrium GDP & the MultiplierInternational Trade & Equilibrium OutputAdding the Public SectorEquilibrium vs Full-Employment GDP