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Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #1 Chapter Topics The Composition of GDP The Demand for Goods The Determination of Equilibrium.

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Presentation on theme: "Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #1 Chapter Topics The Composition of GDP The Demand for Goods The Determination of Equilibrium."— Presentation transcript:

1 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #1 Chapter Topics The Composition of GDP The Demand for Goods The Determination of Equilibrium Output Investment Equals Saving Is the Government Omnipotent?

2 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #2 Introduction

3 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #3 The 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)

4 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #4 The 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) I S -- Inventory Investment Production - sales (1% of GDP)

5 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #5 The Composition of GDP Billions of DollarsPercent of GDP GDP (Y)8509100 Consumption (C)580668 Investment (I)130815 Nonresidential93911 Residential3694 Government Spending (G)148818 Net Exports-154-2 Exports (X)95811 Imports (Q)-1112-13 Inventory Investment (I S )611

6 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #6 The Demand for Goods

7 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #7 The 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) Assumptions

8 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #8 The Demand for Goods The main determinant of C is disposable income (Y D ) The consumption function C = C(Y D ) C = C 0 + C 1 Y D C 1 = propensity to consume 0 < C 1 < 1 Consumption (C)

9 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #9 The Demand for Goods C = C 0 + C 1 Y D C 0 = C when Y D is zero C = C 0 + C 1 Y D Consumption (C)

10 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #10 Consumption and Disposable Income Disposable Income,Y D Consumption, c Consumption function C = c 0 + C 1 Y D Slope = c 1

11 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #11 The 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)

12 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #12 The Demand for Goods C = C 0 + - C 1 Y D Consumption (C)

13 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #13 The Demand for Goods Investment is an exogenous variable Endogenous Variables C is endogenous because it responds to production (Y) C = C 0 – C 1 (Y – T) Investment (I)

14 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #14 The 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)

15 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #15 The Determination of Equilibrium Output Demand for Goods (Z) depends on income (Y), taxes (T), investment ( I ), and government spending (G) Demand for Goods (Z)

16 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #16 Assume Firms do not hold inventories Y = supply of goods The Determination of Equilibrium Output Equilibrium Equilibrium occurs when: Supply of goods (Y) = Demand for goods (Z)

17 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #17 Identity Equations Behavioral Equations Equilibrium Equations The Determination of Equilibrium Output The Model and Equation Types

18 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #18 Y = supply Z = Demand = Y = Z @ equilibrium The Determination of Equilibrium Output Finding Equilibrium

19 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #19 1) Algebra to confirm the logic 2) Graphs to build the intuition 3) Words to explain the results The Determination of Equilibrium Output Three Steps to Solving a Model

20 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #20 The Determination of Equilibrium Output The Algebra Equilibrium Condition Y=Z

21 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #21 The Determination of Equilibrium Output The Algebra: Y=Z

22 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #22 What determines the size of the multiplier? What does the multiplier imply? The Determination of Equilibrium Output Questions

23 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #23 C 0 increases by $1 billion C 1 = 0.6 The Determination of Equilibrium Output Assume Question What is the change in Y due to the change in C 0 ?

24 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #24 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 of Equilibrium Output Questions for Discussion

25 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #25 Equilibrium in the Goods Market Income,Y Demand (Z), Production (Y) 45 o line Production Slope = 1 Y1Y1 Y1Y1

26 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #26 Equilibrium in the Goods Market Income,Y Demand (Z), Production (Y) 45 o line Production ZZ Demand ZZ depends on 1) autonomous spending 2) income

27 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #27 Equilibrium in the Goods Market Income,Y Demand (Z), Production (Y) 45 o line Production ZZ Demand Autonomous spending Equilibrium point: Y = Z Slope = 1 A

28 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #28 What is the relationship between Z and Y at income levels less than Y and greater than Y? The Determination of Equilibrium Output Question for Discussion

29 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #29 Equilibrium in the Goods Market B ZZ Income,Y Demand (Z), Production (Y) 45 o line Y ZZ A Y Y1Y1 Y1Y1 C D A

30 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #30 B ZZ Income,Y Demand (Z), Production (Y) 45 o line Y ZZ A Y Y1Y1 Y1Y1 A Equilibrium in the Goods Market Y ZZ A Y Income,Y Demand (Z), Production (Y) 45 o line

31 Chapter 3: The Goods MarketBlanchard: Macroeconomics Slide #31 Leakages and Injections Another way to equilibrium Income = Expenditure C + S + T = C + I + G S + T = I + G


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