Download The Aggregate Expenditures Model

11
The Aggregate Expenditures
Model
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Assumptions and Simplifications
• Not at full-employment
• Prices are fixed
• GDP = DI
• Begin with private, closed economy
• No government
• No trade
LO1
Assumptions and Simplifications
• Private, Closed Economy
• The two components of aggregate
expenditures are consumption (C)
and gross investment (Ig)
• GDP, NI, PI, and DI are same
LO1
Income, Consumption, and Saving
LO1
Investment Schedule (Ig)
• Shows the amount that businesses
•
•
LO1
plan to invest at different levels of
GDP
Assume investment (Ig) is
independent of GDP
Investment is constant at all GDP
levels
Consumption and Investment
Investment
demand
curve
8
20
ID
20
Investment
(billions of dollars)
(a)
Investment demand curve
LO2
LO1
Investment Schedule
Investment (billions of dollars)
r and i (percent)
Investment Demand Curve
Investment
schedule
Ig
20
20
Real domestic product, GDP
(billions of dollars)
(b)
Investment schedule
Leakages/Injections
• Leakages – Income not used to buy
•
•
LO1
domestically produced goods and
services
Injections – Spending in addition to
consumption expenditures on
domestically produced goods and
services
GDP, output, income are the same
Aggregate Expenditures
• The amount of goods and services
•
LO1
produced and the level of
employment depend directly on the
level of aggregate expenditures
C + Ig
Equilibrium GDP
(C + Ig = GDP)
LO1
Equilibrium GDP
TABLE 28.2 Determination of the Equilibrium Levels of Employment, Output, and Income: A Private Closed Economy
(2)
Real
Domestic
Output
(and
Income)
(GDP =
DI),*Billio
ns
(3)
Consumption
(C),
Billions
(4)
Saving
(S),
Billions
(1) 40
$370
$375
(2) 45
390
(3) 50
(1)
Possible
Levels of
Employment,
Millions
(5)
Investment
(Ig),
Billions
(6)
Aggregate
Expenditure
(C+Ig),
Billions
(7)
Unplanned
Changes in
Inventories,
(+ or -)
(8)
Tendency of
Employment,
Output, and
Income
$-5
$20
$395
$-25
Increase
390
0
20
410
-20
Increase
410
405
5
20
425
-15
Increase
(4) 55
430
420
10
20
440
-10
Increase
(5) 60
450
435
15
20
455
-5
Increase
(6) 65
470
450
20
20
470
0
(7) 70
490
465
25
20
485
+5
Decrease
(8) 75
510
480
30
20
500
+10
Decrease
(9) 80
530
495
35
20
515
+15
Decrease
(10) 85
550
510
40
20
530
+20
Decrease
Equilibrium
* If depreciation and net foreign factor income are zero, government is ignored and it is assumed that all saving occurs in the household sector of the
economy, then GDP as a measure of domestic output is equal to NI,PI, and DI. Household income = GDP
LO1
Aggregate expenditures, C + Ig (billions of dollars)
Equilibrium GDP
LO3
LO1
530
C + Ig
(C + Ig = GDP)
510
490
470
450
Equilibrium
point
Aggregate
expenditures
C
Ig = $20 billion
430
410
390
C = $450 billion
370
45°
370 390 410 430 450 470 490 510 530 550
Real domestic product, GDP (billions of dollars)
Other Features of Equilibrium GDP
• Saving equals planned investment
• Saving is a leakage of spending
• Investment is an injection of spending
• No unplanned changes in inventories
• Firms do not change production
LO4
LO2
Planned vs. Actual Investment
• Actual investment includes planned
•
LO4
investment (Ig) and unplanned
changes in inventories.
As a result, actual investment equals
savings at all GDP levels.
Multiplier Effect
• An initial change in spending can
cause a greater change in real GDP
Multiplier =
change in real GDP
initial change in spending
Change in GDP = multiplier x initial change in spending
LO4
Multiplier & Marginal Propensities
• Multiplier and MPC directly related
• Multiplier and MPS inversely related
Multiplier =
LO4
1
1- MPC
Multiplier =
1
MPS
Adding International Trade
• Include net exports spending in
•
•
LO4
aggregate expenditures
• Private, open economy
Xn can be positive or negative
Net exports are independent of GDP
=> net exports are constant at all
GDP levels
Adding the Public Sector
LO4
Assumptions and Simplifications
• Government purchases do not impact
•
•
LO4
private spending schedules (C+Ig+Xn)
Net tax revenues derived from
personal taxes
– GDP, NI, & PI remain equal
– DI = PI – Net Personal Taxes
Fixed amount of taxes collected
regardless of GDP (Lump sum tax)
Adding the Public Sector
• Addition of government purchases to
•
LO4
aggregate expenditures (C+Ig+G+Xn) =
mixed open economy
Higher level of aggregate expenditures
Government Purchases and Eq. GDP
TABLE 28.4 The Impact of Government Purchases on Equilibrium GDP
(1)
Real
Domestic
Output and
Income
(GDP=DI),
Billions
(5)
Net Exports
(Xn), Billions
Imports
(M)
(6)
Government
Purchases
(G), Billions
(7)
Aggregate
Expenditures
(C+Ig+Xn+G),
Billions
(2)+(4)+(5)+(6)
$10
$10
$20
$415
20
10
10
20
430
5
20
10
10
20
445
420
10
20
10
10
20
460
(5) 450
435
15
20
10
10
20
475
(6) 470
450
20
20
10
10
20
490
(7) 490
465
25
20
10
10
20
505
(8) 510
480
30
20
10
10
20
520
(9) 530
495
35
20
10
10
20
535
(10) 550
510
40
20
10
10
20
550
(2)
Consumption
(C),
Billions
(3)
Saving (S),
Billions
(4)
Investment
(Ig),
Billions
Exports
(X)
(1) $370
$375
$-5
$20
(2) 390
390
0
(3) 410
405
(4) 430
LO4
Aggregate expenditures (billions of dollars)
Government Purchases and Eq. GDP
C + Ig + Xn + G
C + Ig + X n
C
Government spending
of $20 billion
45°
470
LO7
LO4
550
Real domestic product, GDP (billions of dollars)
Taxation and Equilibrium GDP
TABLE 28.5 Determination of the Equilibrium Levels of Employment, Output, and Income: Private and Public Sectors
(1)
Real
Domestic
Output
and
Income
(GDP),
Billions
(7)
Net Exports
(Xn), Billions
(9)
Aggregate
Expenditures (Ca
+Ig+Xn
+G),
Billions
(4)+(6)+(7)
+(8)
(2)
Taxes
(T),
Billions
(3)
Disposable
Income
(DI),
Billions,
(1)-(2)
(4)
Consumption (Ca),
Billions
(5)
Saving
(Sa),
Billions
(6)
Investment (Ig),
Billions
Export
s
(X)
Import
s
(M)
(8)
Government
Purchases
(G),
Billions
(1) $370
$20
$350
$360
$-10
$20
$10
$10
$20
$400
(2) 390
20
370
375
-5
20
10
10
20
415
(3) 410
20
390
390
0
20
10
10
20
430
(4) 430
20
410
405
5
20
10
10
20
445
(5) 450
20
430
420
10
20
10
10
20
460
(6) 470
20
450
435
15
20
10
10
20
475
(7) 490
20
470
450
20
20
10
10
20
490
(8) 510
20
490
465
25
20
10
10
20
505
(9) 530
20
510
480
30
20
10
10
20
520
(10) 550
20
530
495
35
20
10
10
20
535
LO4
Aggregate expenditures (billions of dollars)
Taxation and Equilibrium GDP
C + Ig + X n + G
Ca + Ig + Xn + G
$15 billion
decrease in
consumption
from a
$20 billion
increase
in taxes
45°
490
LO7
LO4
550
Real domestic product, GDP (billions of dollars)