National Income Determination Report
National Income Determination Report
National Income Determination Report
MACROECONOMICS
Prepared by AGCasana 01/28/12
Aggregate Expenditure
AE = C + I + G + (X-M)
consumption (C), investment (I), government spending (G), and exports less imports (X-M).
If AE < Y
people want to buy less than what has been produced so firms will accumulate inventories. firms will reduce production
If AE >Y
What people want to buy is greater than actual production so inventories will decline. firms will increase production
100
450
100
200
E0 20 AE
When AE is equal to Y
there is no reason for firms to adjust production. this suggests that the economy is in equilibrium.
Equilibrium requires the equality between income and aggregate expenditure. That is, Y = AE.
Suppose that the economy's aggregate expenditure schedule shifts upward AE0 to AE1, Equilibrium point will move from E0 to E1. As a result, the economy experiences an increase in equilibrium income from YO* to Y1*
AE
E1 30 E0 20 AE0 AE1
45 0 20 Y0 30 Y1
Keynes (1936) suggested that consumption spending (C) tends to increase with income.
In other words, households with higher incomes tend to spend more. There is a positive relationship between consumption spending and income
TABLE 1. Consumption and income (in pesos). (1) Income (Y) 0 200 400 600 800 1,000 1,200 1,400 1,600 (2) Consumption (C) 200 350 500 650 800 950 1,100 1,250 1,400 (3) Change In income (Y) 200 200 200 200 200 200 200 200 (4) Change in consumption (C) 150 150 150 150 150 150 150 150 (5) mpc (C/Y) _ 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75
Higher levels of income correspond to higher levels of consumption spending When income is equal to zero, consumption spending is equal to 200. Consumption spending and income are equal at each other when income = 800.
When income is less than 800, consumption is higher than income. When income is greater than 800, consumption less than income
Y
1600 1400 1200 Consumption Spending (in pesos) 1000 800 600 400 200
450
Y
400 800 Output, Income (in pesos) 1200 1600
MPC or the marginal propensity to consume represents the change in consumption spending that arises from a one peso change in income.
(C mpc ! (Y
Value of MPC is between 0 and 1. MPC=0.75 means that a one peso increase in income leads to a 75-centavo increase in consumption spending.
Consumption Function
Y
0 200 400 600 800 1000 1200 1400 1600
C
200 350 500 650 800 950 1000 1200 1400
S Y
0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25
50 50 50 50 50 50 50 50
Savings - that component of income that is not allocated to consumption. S=YC How is savings linked to income? oY p oS.
Marginal propensity to save (MPS) is the increase in savings for a one peso increase in income; In the example above, S = 50 for Y = 200. Implies that
Savings function
Note: MPC+MPS = 1 Savings schedule listing of values of savings at each levels of income Savings function in equation form S = -200 + .25Y
Propensity to Save
S S
F4
150
-200
Two sector economy - households and firms only Implies that AE is given by: AE = C + I Assume that I is autonomous and equal to 100 In equilibrium, Y = AE p equilibrium income (Y*) = 1200
Table 9.3
AE E0 y
C+I = AE C
Fig 5
y (A) 300 200 45 0 S, I S 100 0 -200 Y* Income (in pesos) E0 y y 800 1,200 1,600 I Y (B) 400 800 1,200 Y* 1,600
WHY???
AE
Y
AE1
E1 B E0 A
AE0
400 300
I=100
45o
Y*0
Y*1
In numerical example,
1 Y ! (C I ). 1 mpc 1 !E n multiplier 1 mpc
*
For I = 200, Y* = 1,600 Hence, if Io from 100 to 200 p Y*o from 1200 to 1600. In other words, p p
Increase in Y is greater than increase in I. Why? Multiplier (E) - measures the change in equilibrium income as a result of a one-peso change in the sum of the autonomous components of AE;
(Y E! (I
C +
0 mpc[100] mpc [mpc100]
I =
100 0 0
Y
100 mpc100 mpc2100
mpc[ mpcn-2100]
mpcn-1100
1 1 E! ! 1 mpc mps
Calculation of multiplier
1 E! !4 1 0.75
The multiplier is used determine the amount by which Y* changes in response to a change in investment.
(Y* ! E ( I
So the total change in income is given by: (Y = (I + mpc (I + mpc2(I +mpc3 (I + = (1 + mpc + mpc2 + mpc3 ) . (I or
1 (Y ! (I ! E (I 1 mpc
The Multiplier
Y (Y ! Y (I mpc (I mpc 2 (I mpc 3 (I ... (Y ! (I mpc (I mpc (I mpc (I ...
2 3
Many people believe that higher savings lead to higher income. In the present model, we get a result that is contrary to this belief. In other words, equilibrium income falls when people want to save more. Idea: the attempt to achieve higher savings may reduce equilibrium income
S,I
S1 S0 I
Fig 7
Y1
Y0
End Chapter 9: