Macroeconomics Notes

Composition of GDP

Consumption: goods and services purchased by consumers

Largest component

Investment: sum of non-residential investment (purchases by firms of new plants or new machines) and residential investment (the purchase by people of new houses or apartments)

Government spending: purchases of goods and services by the national, regional and local governments

Doesn’t include transfers or interest payments

Net exports/trade balance: exports minus imports

Trade surplus and trade deficit

Inventory investment/working capital: difference between goods produced and sold in a given year

If production exceeds sales: inventory investment is said to be positive

Less than sales: negative

Demand for goods

Z=C+I+G+X-IM

Identity

Simplifications

All firms produce same good, which can be consumed, invested, or consumed by government—allows us to look at only one market, the goods market

Firms are willing to supply any amount of the good at a given price, P focus on role demand plays in determination of output

Closed economy

Z=C+I+G

Consumption (C)

Disposable Income (YD)

Income that remains after consumers have received transfers from the government and paid their taxes

When this increases, people buy more goods and vice versa

C=C(YD) +

Consumption Function (Behavioral function)

C=c0+c1(YD)

Two Parameters

Marginal Propensity to Consume (c1)

Effect an additional euro of disposable income has on consumption

Must be positive and less than 1

Autonomous Consumption (c0)

What people would consume if their disposable income was zero

Dis-saving

YD=Y-T

T is taxes minus transfers

C=c0+c1(Y-T)

Increases in Y and T have a less than 1 for 1 effect

Investment (I)

Endogenous: variables that depend on other variables in the model and are therefore explained within the model

Exogenous: not explained within the model, but are instead taken as given

I=I exogenous

Assumption that says it will not respond to changes in production

Government...