9 - 1 copyright mcgraw-hill/irwin, 2002 private closed economy consumption and saving nonincome...
TRANSCRIPT
9 - 1Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
Building theAggregate Expenditures
Model
9C H A P T E R
9 - 2Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
PRIVATE CLOSED ECONOMY
Simplifications...
• A Closed Economy• Defer Government & Taxes• Defer Exports and Imports• All Saving Is Personal• Net Income Abroad Is Zero•Aggregate Spending = Consumption and Investment
9 - 3Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
Saving (S) = Disposable Income (DI) -Consumption (C)
Households consume most of their disposable income
Consumption & saving are directly related to income
Consumption ScheduleSaving ScheduleBreakeven Income
CONSUMPTION AND SAVING
9 - 4Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
Co
nsu
mp
tio
nS
avin
g
o
o45
o
C
S
Consumptionschedule
Savingschedule
C
S
Disposable Income
Disposable Income
SAVING
SAVING
DISSAVING
DISSAVING
MPC = Slope of C
MPS = Slope of S
MPC + MPS = 1
CONSUMPTION AND SAVING
9 - 5Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
CONSUMPTION AND SAVING
APC Consumption / Disposable Income
APS Saving / Disposable Income
MPS Change in SavingChange in Disposable Income
MPC Change in ConsumptionChange in Disposable Income
9 - 6Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
.80 .85 .90 .95 1.0
.986
.976
.972
.940
.907
.873
.869
.842
Canada
United States
Netherlands
United Kingdom
Germany
Italy
Japan
France
GLOBAL PERSPECTIVEAverage Propensities to Consume,Selected Nations, 1999
Statistical Abstract of the United States, 2000
9 - 7Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
NONINCOME DETERMINANTSOF CONSUMPTION AND SAVING
• Wealth• Wealth Effects
• Expectations• Taxation• Household Debt
9 - 8Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
• Terminology• Schedule Shifts• Stability
Graphically…
TERMINOLOGY, SHIFTS, & STABILITY
9 - 9Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
Co
nsu
mp
tio
nS
avin
g
o
o45
o
C0
S0
Disposable Income
Disposable Income
C1
S1
TERMINOLOGY, SHIFTS, & STABILITY
Increases inConsumptionMeans…
A DecreaseIn Saving
9 - 10Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
Co
nsu
mp
tio
nS
avin
g
o
o45
o
C0
S0
Disposable Income
Disposable Income
C2
S2
TERMINOLOGY, SHIFTS, & STABILITY
Decreases inConsumptionMeans…
An IncreaseIn Saving
9 - 11Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
Expected Rate of Return, r
Real Interest Rate, i
Inverse relationship betweenInvestment demand and theexpected rate of return
INVESTMENT
Graphically presented...
9 - 12Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow Investment (billions of dollars)
Ex
pe
cte
d r
ate
of
retu
rn,
r,a
nd
inte
res
t ra
te, i
(pe
rce
nts
) 16
14
12
10
8
6
4
2
0
INVESTMENTDEMAND
CURVE
5 10 15 20 25 30 35 40
INVESTMENT
I D
9 - 13Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
•Acquisition, Maintenance, and Operating Costs
•Business Taxes•Technological Change•Stock of Capital Goods on Hand
•Expectations
SHIFTS IN INVESTMENT DEMAND
9 - 14Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
GLOBAL PERSPECTIVEGross Investment Expenditures as a Percentage of GDP, Selected Nations
40%
30%
20%
10%
0%Germany FranceUnited
StatesCanadaMexico United
KingdomSwedenJapan South
Korea
Source: World Bank
9 - 15Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
INVESTMENT DEMAND & SCHEDULE
Exp
ecte
d r
ate
of
retu
rn,
r, a
nd
real
in
tere
st r
ate,
i (
per
cen
ts)
Inve
stm
ent
(bil
lio
ns
of
do
lla
rs)
Investment(billions of dollars)
20
8
20
Real Domestic Product, GDP(billions of dollars)
I D
Ig
InvestmentDemandCurve
InvestmentSchedule
20
20
9 - 16Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
•Durability of Capital and
Variability of Expectations
•Irregularity of Innovation
•Volatility of Investment
INSTABILITY OF INVESTMENT
9 - 17Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
EQUILIBRIUM GDP
GDP = C + Ig
Real Domestic OutputAggregate Expenditures ScheduleEquilibrium GDP
Saving and Planned Investment are Equal•Leakage•Injection
No Unplanned Changes in Inventories
Actual Investment
9 - 18Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
Pri
vate
sp
end
ing
, C +
I g
(bill
ion
s o
f d
olla
rs)
o45
o
C
C + Ig
Ig = $20 Billion
Equilibrium
Real domestic product, GDP (billions of dollars)
370 390 410 430 450 470 490 510 530 550
(C + I g = GDP)
EQUILIBRIUM GDP
C =$450 Billion
$530
510
490
470
450
430
410
390
370
9 - 19Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
Pri
vate
sp
end
ing
, C +
I g
(bill
ion
s o
f d
olla
rs)
o45
o
C
C + Ig
Ig = $20 Billion
Equilibrium
Real domestic product, GDP (billions of dollars)
370 390 410 430 450 470 490 510 530 550
(C + I g = GDP)
EQUILIBRIUM GDP
C =$450 Billion
$530
510
490
470
450
430
410
390
370
Say’s Law
9 - 20Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
Pri
vate
sp
end
ing
, C +
I g
(bill
ion
s o
f d
olla
rs)
o45
o
C
C + Ig
Ig = $20 Billion
Equilibrium
Real domestic product, GDP (billions of dollars)
370 390 410 430 450 470 490 510 530 550
(C + I g = GDP)
EQUILIBRIUM GDP
C =$450 Billion
$530
510
490
470
450
430
410
390
370
ChapterConclusions
• consumption schedule• saving schedule• break-even income• average propensity to consu
me (APC)• average propensity to save (
APS)• marginal propensity to consu
me (MPC)• marginal propensity to save (
MPS)• wealth effect• expected rate of return• real interest rate
• investment demand curve• planned investment• investment schedule• aggregate expenditures
schedule• equilibrium GDP• 45 degree line• leakage• injection• unplanned changes in
inventories• actual investment
Copyright McGraw-Hill/Irwin, 2002ENDBACK
9 - 22Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
PreviousSlide
NextSlide
EndShow
Next...Aggregate Expenditures
The Multiplier, Net Exports,and Government
Chapter 10