module 16- consumption, income, and the multiplier j.a.sacco
TRANSCRIPT
Module 16- Consumption, Income, and the Multiplier
J.A.SACCO
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Introduction
You have two choices when you earn income--you can either consume it or save it. What you
do not consume is, by definition, what you save.
Saving is important because investment is impossible without it. In the United States, the
rate of personal saving has dropped significantly over the past several decades.
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Did You Know That...
Personal consumption expenditures in the United States have averaged about two-thirds of gross domestic product for decades?
John Maynard Keynes focused much of his research on what determines how much you and I decide to spend
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Module 16 GOALS
Focus on what determines spending and savingConcentrate on the relationship between a persons income and how much they spend (consume) and saveAnalyze the relationship of consumption, investment, government expenditure, and net exports (GDP)In other words, what causes the changes in GDP?
C+I+G+(X-M)
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Module 16 GOALS
Why is this important to our study of economics?
?
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Some Simplifying Assumptions in the Keynesian Income Determination Model
Keynes Revisited Equilibrium level of GDP is demand determined Concentrated on elements of desired aggregate
expenditures Horizontal SRAS- Keynesian Range so inflation is
not possible/no change in price level Since PL is constant, any change in economic
variables such as income, will be equal to a real change in terms in purchasing power
Hence-Examine Keynes ideas with inflexible prices
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Definitions and Relationships
Definitions & Relationships Revisited Consumption
Spending on new goods and services out of a household’s current income
Saving The act of not consuming all of one’s income
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Definitions and Relationships
Consume It!• Gone forever• Consumption goods
(household purchases for immediate satisfaction—food, clothing, movies, etc…)
Save It!• Able to consume at a
future time and perhaps more with interest
Two things you can do with income:
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Definitions and Relationships
Consumption + Saving= Disposable Income
OR
Saving= Disposable Income-Consumption
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Definitions and Relationships
Dissaving- Negative saving. A situation where spending exceeds income.Investment-The spending by business on things which can be used to produce goods and services in the future.Stocks/Flows-A stock is a variable measured at a point in time. A flow is a variable measured over a period of time.
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Stocks and Flows
Which is a stock? Which is a flow?SavingSavingsConsumption Investment
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Stocks and Flows
Saving- (FLOW)- particular rate-daily monthly, yearly
Savings- (STOCK)- certain point in time saving+saving+saving=savings Consumption-(Flow)- related to saving, consume at
a certain rate Investment-(Flow)- expenditures by firms on new
machinery/equipment-yield future stream of income- “fixed investment”
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Classical Economic View of Consumption and Saving
Saving is based on the interest rate!
Interest rate increases
Saving increase Consumption decrease
Interest rate decreases
Saving decreases Consumption increases
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Determinants of Planned Consumption and Planned Saving
Keynes Says NO!!!• Interest rate not the key to what determines
an individuals consumption and saving decisions.
• Keynes argued that saving and consumption decisions depend primarily on an individual’s real current income.
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Determinants of Planned Consumption and Planned Saving
Keynes was concerned with changes in AD.
X G I C AD
If we can determine the reasons and tendencies of consumption and saving, it might be possible to determine the future macroeconomy.
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Real Consumption and Saving Schedules: A Hypothetical Case
(1) (2) (3) (4) (5) (6) (7)Planned Average Average
Real Planned Real Saving Propensity Propensity Marginal MarginalDisposal Real Con- Per Year to Consume to Save Propensity Propensity
Income per sumption (S=Yd-C) (APC=C/Yd) (APS=S/Yd) to Consume to SaveCombination Year (Yd) per year (C) (1) - (2) (2)/(1) (3)/(1) )dYC/(MPC )dYS/(MPS
A $0B 2,000C 4,000D 6,000E 8,000F 10,000G 12,000H 14,000I 16,000J 18,000K 20,000
$2,000 3,6005,2006,8008,40010,00011,60013,20014,80016,40018,000
$-2,000-1,600-1,200
-800-400
0400800
1,2001,6002,000
----1.81.31.1331.051.0
.967
.943
.925
.911
.9
-----.8-.30.133-.05.0.033.057.075.089.1
----.8.8.8.8.8.8.8.8.8.8
----.2.2.2.2.2.2.2.2.2.2
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The Consumptionand Saving Functions
Real Disposable Income (Yd dollars per year)
Pla
nn
ed R
eal C
on
sum
pti
on
(C, d
olla
rs p
er y
ear)
0
2,000
4,000
8,000
12,000
16,000
20,000
4,000 8,000 12,000 16,000 20,000
Consumptionfunction
A
B
C
D
E
F G
H
I
J
K
C=Yd
450
Saving
Autonomousconsumption
Break-evenincome
Dissaving
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Determinants of Planned Consumption and Planned Saving
Causes of Shifts in the Consumption Function. Non-income determinants of consumption.
Population- Increase consumption function upward.
Expectations- Better times upward/worse times downward.
Wealth- Increase real household wealth upward/decrease downward.
Can you think of other non-income determinants of consumption?
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Determinants of Planned Consumption and Planned Saving
Household Debt- Can increase consumption with borrowing or more debt. However as accumulate more debt, need to use more disposable income to pat off debt thus decreasing consumption.Inflation- Inflation down/upward, inflation up/downward.Taxes/Transfer Payments- more taxes C and S down/ less taxes C and S up. More transfer payments both C and S up, less C and S down.
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C2
The Consumptionand Saving Functions
Real Disposable Income (Yd dollars per year)
Pla
nn
ed R
eal C
on
sum
pti
on
(C, d
olla
rs p
er y
ear)
45o
C1
Assume positiveeconomic expectationsC1
Y1 Y2
C2
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C2
C2
Y2
C1
The Consumptionand Saving Functions
Real Disposable Income (Yd dollars per year)
Pla
nn
ed R
eal C
on
sum
pti
on
(C, d
olla
rs p
er y
ear)
45o
C1
Y1
Assume wealthdecreases
Y2
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The Consumptionand Saving Functions
Therefore an upward shift in consumption tells us that at all levels of disposable income, consumption is greater. If consumption is greater at all levels of disposable income, saving must be lower., and vice-versa. The only exception is taxes and transfer payments.