Download Handout #5 - Texas A&M University

Slide Show #5
AGEC 430
Macroeconomics of Agriculture
Spring 2010
Handout #5
GDP = C + I + G + X – M
where:
Investment expenditures represent
18-20% of GDP
C = consumption expenditures
I = investment expenditures
G = government expenditures
X = exports
M = imports
Annual level of gross private domestic investment. This is significant
since it not only affects GDP but also indirectly affects the growth of the
economy’s productive capacity and employment over the longer run.
Annual percent change in gross private domestic investment. Note the
decline is sharper than any recession dating back to the Great
Depression.
Let’s graph this function
Planned Investment Function
Level of autonomous
investment spending
I = AI – f(i)
Planned Investment Function
The slope of the investment
function is the marginal
efficiency of investment, or:
f = I / i
I = AI – f(i)
Planned Investment Function
Level of investment
expenditures would
be $250 at an interest
rate of 9 percent if
f = 25.
I = $475 – 25(9.0)
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)
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 = $475 + $50 – 25(7.0)
Average stock during
year captured in the
brackets…
Handout #6
What is E(P) x E(Y)?
What is E(P) x E(Y)?
… Revenue
Ratio of MVP to MIC. We know that
profit maximizing firms will acquire
inputs up to the point where MVP=MIC
Expected output is given by the desired use of labor and capital.
What is missing here?
More on this shortly
Can you give an example
of a expenditure that
represents:
1. A one-hoss shay
2. A geometric decay?
Is there a pattern missing
here?
How do these capacity
depreciation patterns
compare to:
1. Tax depreciation?
2. Economic
depreciation?
Is there a subsidy from
the IRS here?
The market value of an asset
declines the most percentage
wise in the first year. This
affects the current market
value balance sheet.
SL represents the straight line
depreciation pattern. The DDB
represents the more liberal
double declining balance
depreciation or MACRS
pattern. This affects the book
value balance sheet.
Comparison of Depreciation Concepts
Economic Depreciation
Tax Depreciation
Capacity Depreciation