Basic Macro Relationships

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Presentation transcript:

Basic Macro Relationships

Income, Consumption & Savings Income is essentially split into three flows: Consumption (C) Savings (S) Taxes (T) Income minus Taxes is considered Disposable Income (DI or after-tax income). Disposable income is the largest factor for determining the level of Consumption and Savings for the economy.

Basic Relationships Disposable Income DI = Y - T Savings (or Private Savings) SPrivate = Y - T - C Remember: Y is GDP

Sometimes called a “consumption line” or “consumption function”

Savings

Dissavings

Consumption Schedule and Savings Schedule The relationship between disposable income and consumption as well as disposable income and savings (or dissavings) can also been seen via Consumption and Savings Schedules. Disposable Income Consumption Savings $ 370 $ 375 $ -5 $ 390 $ 0 $ 410 $ 405 $ 5 $ 430 $ 420 $ 10 $ 450 $ 435 $ 15 $ 470 $ 20 $ 490 $ 465 $ 25 $ 510 $ 480 $ 30 $ 530 $ 495 $ 35 $ 550 $ 40

The Consumption Schedule Observing the consumption schedule will yield the following properties of consumption: Break Even Aggregate Income – income level at which households plan to consume their entire income Marginal Propensity to Consume – the change in consumption for a one dollar change in income Average Propensity to Consume – the fraction of total income that is consumed Marginal Propensity to Save – the change in savings for a one dollar change in income Average Propensity to Save – the fraction of total income that is saved

The Consumption Schedule Observing the consumption schedule will yield the following properties of consumption: Marginal Propensity to Consume (MPC) 𝑀𝑃𝐶= ∆ 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 ∆ 𝑖𝑛𝑐𝑜𝑚𝑒 Average Propensity to Consume (APC) 𝐴𝑃𝐶= 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 𝑖𝑛𝑐𝑜𝑚𝑒 Marginal Propensity to Save (MPS) 𝑀𝑃𝑆= ∆ 𝑠𝑎𝑣𝑖𝑛𝑔𝑠 ∆ 𝑖𝑛𝑐𝑜𝑚𝑒 Average Propensity to Save (APS) 𝐴𝑃𝑆= 𝑠𝑎𝑣𝑖𝑛𝑔𝑠 𝑖𝑛𝑐𝑜𝑚𝑒 MPC + MPS = 1

APS Around the Globe

Consumption Schedule and Savings Schedule The relationship between disposable income and consumption as well as disposable income and savings (or dissavings) can also been seen via Consumption and Savings Schedules. Disposable Income Consumption Savings APC APS MPC MPS $ 370 $ 375 $ -5 $ 390 $ 0 ? $ 410 $ 405 $ 5 $ 430 $ 420 $ 10 $ 450 $ 435 $ 15 $ 470 $ 20 $ 490 $ 465 $ 25 $ 510 $ 480 $ 30 $ 530 $ 495 $ 35 $ 550 $ 40

Consumption Schedule and Savings Schedule The relationship between disposable income and consumption as well as disposable income and savings (or dissavings) can also been seen via Consumption and Savings Schedules. Disposable Income Consumption Savings APC APS MPC MPS $ 370 $ 375 $ -5 $ 390 $ 0 1.00 $ 410 $ 405 $ 5 $ 430 $ 420 $ 10 $ 450 $ 435 $ 15 $ 470 $ 20 .96 $ 490 $ 465 $ 25 $ 510 $ 480 $ 30 .06 $ 530 $ 495 $ 35 $ 550 $ 40

Consumption Schedule and Savings Schedule The relationship between disposable income and consumption as well as disposable income and savings (or dissavings) can also been seen via Consumption and Savings Schedules. Disposable Income Consumption Savings APC APS MPC MPS $ 370 $ 375 $ -5 1.01 -0.01 $ 390 $ 0 1.00 0.00 $ 410 $ 405 $ 5 .99 .01 $ 430 $ 420 $ 10 .98 .02 $ 450 $ 435 $ 15 .97 .03 $ 470 $ 20 .96 .04 $ 490 $ 465 $ 25 .95 .05 $ 510 $ 480 $ 30 .94 .06 $ 530 $ 495 $ 35 .93 .07 $ 550 $ 40

Consumption Schedule and Savings Schedule The relationship between disposable income and consumption as well as disposable income and savings (or dissavings) can also been seen via Consumption and Savings Schedules. Disposable Income Consumption Savings APC APS MPC MPS $ 370 $ 375 $ -5 1.01 -0.01 ? $ 390 $ 0 1.00 0.00 $ 410 $ 405 $ 5 .99 .01 $ 430 $ 420 $ 10 .98 .02 $ 450 $ 435 $ 15 .97 .03 $ 470 $ 20 .96 .04 $ 490 $ 465 $ 25 .95 .05 $ 510 $ 480 $ 30 .94 .06 $ 530 $ 495 $ 35 .93 .07 $ 550 $ 40

Consumption Schedule and Savings Schedule The relationship between disposable income and consumption as well as disposable income and savings (or dissavings) can also been seen via Consumption and Savings Schedules. Disposable Income Consumption Savings APC APS MPC MPS $ 370 $ 375 $ -5 1.01 -0.01 .75 .25 $ 390 $ 0 1.00 0.00 $ 410 $ 405 $ 5 .99 .01 $ 430 $ 420 $ 10 .98 .02 $ 450 $ 435 $ 15 .97 .03 $ 470 $ 20 .96 .04 $ 490 $ 465 $ 25 .95 .05 $ 510 $ 480 $ 30 .94 .06 $ 530 $ 495 $ 35 .93 .07 $ 550 $ 40

NonIncome Determinants of Consumption and Savings Other things affect consumption and savings (not just income). These things would shift the consumption function line up or down: Wealth Borrowing Expectations Real Interest Rates

Investment The investment decision by firms is based on making a profit. If a firm is to borrow money for investment, the expected return needs to be greater than the cost of borrowing the money (an interest rate).

Shifts in the Investment Demand Curve Expectations The Level of Economic Activity The Stock of Capital Public Policy Technological Change Other Costs (of the factors of production)