chapter topics
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Chapter Topics. The Composition of GDP The Demand for Goods The Determination of Equilibrium Output Investment Equals Saving Is the Government Omnipotent?. Introduction. The Composition of GDP. C -- Consumption Goods and services purchased by consumers (68% of GDP) - PowerPoint PPT PresentationTRANSCRIPT
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Chapter 3: The Goods Market Slide #1Blanchard: Macroeconomics
Chapter TopicsChapter Topics
The Composition of GDP
The Demand for Goods
The Determination of Equilibrium Output
Investment Equals Saving
Is the Government Omnipotent?
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Chapter 3: The Goods Market Slide #2Blanchard: Macroeconomics
IntroductionIntroduction
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Chapter 3: The Goods Market Slide #3Blanchard: Macroeconomics
The Composition of GDPThe Composition of GDP C -- Consumption
Goods and services purchased by consumers (68% of GDP)
I -- Fixed Investment Nonresidential and residential investment (15% of
GDP)
G -- Government Spending Purchases by federal, state, and local
governments. Excludes transfer payments (18% of GDP)
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Chapter 3: The Goods Market Slide #4Blanchard: Macroeconomics
The Composition of GDPThe Composition of GDP
X - Q -- Net Exports Exports (X) (11% of GDP) - Imports (Q)
(13% of GDP) X > Q -- trade surplus X < Q trade deficit (2% of GDP)
IS -- Inventory Investment Production - sales (1% of GDP)
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Chapter 3: The Goods Market Slide #5Blanchard: Macroeconomics
The Composition of GDPThe Composition of GDP
Billions of Dollars Percent of GDP
GDP (Y) 8509 100
Consumption (C) 5806 68
Investment (I) 1308 15
Nonresidential 939 11
Residential 369 4
Government Spending (G) 1488 18
Net Exports -154 -2
Exports (X) 958 11
Imports (Q) -1112 -13
Inventory Investment (IS) 61 1
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Chapter 3: The Goods Market Slide #6Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
Q- X G I C Z
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Chapter 3: The Goods Market Slide #7Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
1. All firms produce the same good (The Goods Market)
2. The supply of goods is completely elastic at price P
3. The economy is closed. (X - Q = 0)
AssumptionsAssumptions
G I C Z
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Chapter 3: The Goods Market Slide #8Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
The main determinant of C is disposable income (YD)
The consumption function
• C = C(YD)
• C = C0 + C1YD
• C1 = propensity to consume
• 0 < C1 < 1
Consumption (C)Consumption (C)
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Chapter 3: The Goods Market Slide #9Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
C = C0 + C1YD
C0 = C when YD is zero
C = C0 + C1YD
Consumption (C)Consumption (C)
T- YYD ( )
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Chapter 3: The Goods Market Slide #10Blanchard: Macroeconomics
Consumption and Disposable IncomeConsumption and Disposable Income
Disposable Income,YD
Co
nsu
mp
tio
n,
c
ConsumptionfunctionC = c0 + C1YD
Slope = c1
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Chapter 3: The Goods Market Slide #11Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
In the U.S., the main taxes paid by individuals are: Income Social Security
The main sources of government transfers are Social Security Medicare Medicaid
Consumption (C)Consumption (C)
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Chapter 3: The Goods Market Slide #12Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
C = C0 +- C1YD
T- YYD ( )
T)- (Y CC C 10 -
Consumption (C)Consumption (C)
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Chapter 3: The Goods Market Slide #13Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
Investment is an exogenous variable
Endogenous Variables C is endogenous because it responds to
production (Y) C = C0 – C1 (Y – T)
Investment (I)Investment (I)
_
I I
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Chapter 3: The Goods Market Slide #14Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
G & T describe fiscal policy
G & T are exogenous no reliable behavioral role for G & T G & T are determined outside the model
Government Spending (G)Government Spending (G)
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Chapter 3: The Goods Market Slide #15Blanchard: Macroeconomics
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
Demand for Goods (Z) depends on income (Y), taxes (T), investment ( I ), and government spending (G)
0) Q- (X G I C Z
) T- YCC C 10 (
G I T)- YC C 10 ( Z
Demand for Goods (Z)Demand for Goods (Z)
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Chapter 3: The Goods Market Slide #16Blanchard: Macroeconomics
Assume Firms do not hold inventories Y = supply of goods
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
EquilibriumEquilibrium
Equilibrium occurs when:Equilibrium occurs when:
Supply of goods (Y) = Demand for goods (Z)
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Chapter 3: The Goods Market Slide #17Blanchard: Macroeconomics
Identity Equations
• Behavioral Equations
• Equilibrium Equations
•
T- YYD
) T-YCC C 10 (
Z Y
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
The Model and Equation TypesThe Model and Equation Types
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Chapter 3: The Goods Market Slide #18Blanchard: Macroeconomics
Y = supply Z = Demand = Y = Z @ equilibrium
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
G I T)- YC C_
10 (
G I T)- YC C_
10 ( Y
Finding EquilibriumFinding Equilibrium
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Chapter 3: The Goods Market Slide #19Blanchard: Macroeconomics
1) Algebra to confirm the logic
2) Graphs to build the intuition
3) Words to explain the results
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
Three Steps to Solving a ModelThree Steps to Solving a Model
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Chapter 3: The Goods Market Slide #20Blanchard: Macroeconomics
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
The AlgebraThe Algebra
Equilibrium Condition Y=Z
G I T)- YC C Z_
10 (
G I T)- YC C Y_
10 (
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Chapter 3: The Goods Market Slide #21Blanchard: Macroeconomics
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
The Algebra: Y=ZThe Algebra: Y=Z
TC- G I C
C-1
1 Y 1
_
01
spending autonomous TC- G I C 1
_
0
multiplier the is and 1 C-1
1
1
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Chapter 3: The Goods Market Slide #22Blanchard: Macroeconomics
What determines the size of the multiplier?
What does the multiplier imply?
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
QuestionsQuestions
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Chapter 3: The Goods Market Slide #23Blanchard: Macroeconomics
C0 increases by $1 billion
C1 = 0.6
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
AssumeAssume
QuestionQuestion
What is the change in Y due to the change in C0?
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Chapter 3: The Goods Market Slide #24Blanchard: Macroeconomics
Would a change in I, G, or T have the same impact on Y?
If I fell by $100 and C1=.8, what is the change in Y?
If G increases by $75 and C1=.9, what is the change in Y?
If T increases by $75 and C1=.9, what is the change in Y?
If both G and T increase by $75, what is the change in Y?
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
Questions for DiscussionQuestions for Discussion
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Chapter 3: The Goods Market Slide #25Blanchard: Macroeconomics
Equilibrium in the Goods MarketEquilibrium in the Goods Market
Income,Y
Dem
and
(Z
), P
rod
uct
ion
(Y
)45o line
Production
Slope = 1
Y1
Y1
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Chapter 3: The Goods Market Slide #26Blanchard: Macroeconomics
Equilibrium in the Goods MarketEquilibrium in the Goods Market
Income,Y
Dem
and
(Z
), P
rod
uct
ion
(Y
)45o line
Production
ZZ
Demand
ZZ depends on1) autonomous spending2) income
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Chapter 3: The Goods Market Slide #27Blanchard: Macroeconomics
Equilibrium in the Goods MarketEquilibrium in the Goods Market
Income,Y
Dem
and
(Z
), P
rod
uct
ion
(Y
)45o line
Production
ZZ
Demand
Autonomousspending
Equilibrium point:Y = Z
Slope = 1
A
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Chapter 3: The Goods Market Slide #28Blanchard: Macroeconomics
What is the relationship between Z and Y at income levels less than Y and greater than Y?
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
Question for DiscussionQuestion for Discussion
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Chapter 3: The Goods Market Slide #29Blanchard: Macroeconomics
Equilibrium in the Goods MarketEquilibrium in the Goods Market
B
ZZ’
Income,Y
Dem
and
(Z
), P
rod
uct
ion
(Y
)45o line
Y
ZZ
AY
Y1
Y1
C
DA’
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Chapter 3: The Goods Market Slide #30Blanchard: Macroeconomics
B
ZZ’
Income,Y
Dem
and
(Z
), P
rod
uct
ion
(Y
)45o line
Y
ZZ
AY
Y1
Y1
A’
Equilibrium in the Goods MarketEquilibrium in the Goods Market
Y
ZZ
AY
Income,Y
Dem
and
(Z
), P
rod
uct
ion
(Y
)45o line
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Chapter 3: The Goods Market Slide #31Blanchard: Macroeconomics
Leakages and InjectionsLeakages and Injections
Another way to equilibrium
Income = Expenditure
C + S + T = C + I + G
S + T = I + G