PRINCIPLES OF MACROECONOMICS
PRINCIPLES OF MACROECONOMICS ECON 2105
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This 12 page Class Notes was uploaded by Amelia Reynolds on Monday September 21, 2015. The Class Notes belongs to ECON 2105 at Georgia State University taught by Jon Mansfield in Fall. Since its upload, it has received 14 views. For similar materials see /class/209822/econ-2105-georgia-state-university in Economcs at Georgia State University.
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Date Created: 09/21/15
The Basic Model Spending Econ 2105 Dr Jon Mansfield 1 The Components of Spending C I G X M Consumption spending Household sector Household spending on currently produced goods durable nondurable amp services primary determinant is disposable income Yd Y T marginal propensity to consume as Yd inc C inc but by a smaller amount C f Y T i ConsConf Wealth Credit Investment spending Firm sector Business spending on structures amp equipment also firm s additions to inventories amp household spending on residential increase ability to produce goods and services in future Investment is the addition to the capital stock I change in CS I f Y i Bus Conf Competitio n Governmentspending Public Sector Federal State and Local spending on consumer and investment g amp 5 independent of income used as a policy instrument G f Y policy 0 Exports Spending on domestically produced goods amp services by other countries X f Y foreign GDP Y Exchange Rate R 0 Imports Spending on foreign produced goods amp services by domestic residents M f Y Exchange RateR The Basic Model Spending 2 2 Aggregate spending Planned spending on currently produced g amp s by all sectors in the economy household business government foreign E C I G X M AE autonomous expenditures expenditures that don t depend on the level of income everything else that is held constant movement along the curve E1 changes in Y everything else held constant E f Y T i ConsConf Wealth Credit BusCon Comp G Y R 45 line represents equilibrium income from production must equal expenditures Y E E E1 3 Changes in planned aggregate expenditures AE 45 Y dec i gt inc C 1 gt inc E at every Y E dec T gt inc C gt quot inc CC gt inc C gt quot inc W gt inc C gt quot inc Cr gt inc C gt quot inc BC gt inc 1 gt quot inc Comp gt inc 1 gt quot incG gt incG gt quot AAE inc Y gt inc X gt quot dec R gt inc X dec M gt quot The initial increase in expenditure generates a multiplier effect on income AY gt AAE Econ 2105 Principles of Macroeconomics Dr Jon Mans eld Macro Introduction Econ 2105 Principles of Macroeconomics Dr Jon Mans eld Macro Lecture 1 1 Definitions Economics the study of how society allocates scarce resources to satisfy unlimited wants Market an institution which brings together buyers and sellers of particular goods and services Equilibrium a state of balance among opposing econom39c forces Total Income Total Expenditures Difference between income and balance sheet items flows and stocks Investment change in the capital stock over a period of time Saving change in wealth over a period of time Deficit expenditures gt income 2 Introduction to GDP Gross Domestic Product GDP value of all currently produced final goods and services over a period of time within the borders of the US Gross National Product GNP value of all currently produced nal goods and services over a period of time using resources of US residents no matter where produced GDP income of US residents earned abroad payments to foreigners GNP Nominal GDP total spending on nal goods and services during the year is added in dollar terms income must equal expenditures Real GDP nominal GDP adjusted for price changes constant dollar or 2000 dollars measure of real purchasing power nominal GDP divided by the price level Macro Introduction 2 3 Nominal and Real Values If prices change over the period we need an index to compare 2 periods the cost of buying items in GDP during the period relative to some base period The base period index is set equal to 100 if the index is greater than 100 the general level of prices has increased Inflation is an increase in the general level of prices from one period to another the dollar declines in purchasing power P1 P0 P0 x 100 where P1 is the price level in period 1 and P0 is the base period GDP de ator consumer price index CPI producer price index PPI 4 Circular Flow Diagram For economic analysis we are interested in Real GDP the real amount of goods and services produced The following diagram the Circular Flow describes the flow of real income and spending by all the sectors in an economy Consumption spending by the household sector on real goods durable and non durable amp services Investment spending by firms on structures amp equipment also residential and inventory Government spending by Federal and State amp Local governments on consumption amp investment type goods amp services Exports spending by other countries on domestically produced goods amp services Imports spending by domestic residents on goods amp services produced in the rest of the world Econ 2105 Principles of Macroeconomics Dr Jon Mans eld Macro Introduction Circular Flow of Income in an Open Mixed Economy Foreign Sector Domestic Markets for currently produced goods and services c Income T Household Sector Government Sector Firm Sector Borrowing Financial Markets Income Ex enses rent p interest Resource prom Markets Econ 2105 Principles of Macroeconomics Dr Jon Mans eld Macro Introduction 5 Gross Domestic Product GDP From the circular flow aggregate expenditures on real goods and services by all sectors in the economy equals the aggregate income of resource suppliers actual expenditures on real output always equal actual real income E Y GDP Gross Domestic Product value of nal goods expenditures GDI Gross Domestic Income payments to resource suppliers Income from production E Y Expenditure approach Income approach expenditures on newly produced final goods and income payments to resource suppliers serVIces household sector consumption expenditures C wages labor rm sector investment expenditures I rent land government sector government expenditures G interest capital foreign sector export expenditures X profit entrepreneurship foreign sector import exports M Definitions Y Income from production Yd Disposable Income Yd Y T E Expenditures T Taxes Z aggregate domestic expenditures S Saving S Yd C C I G K capital account buyingselling of real and nancial assets Economy E Y injections leakages closed private C I C S I S closedmixed CIGCST 16 ST openmixed CIGX MCST IGX STM Econ 2105 Principles of Macroeconomics Dr Jon Mans eld Macro Introduction 5 51 TG XM excess saving of the private excess saving of the public net exports sector sector net saving of economy Y Z current account Although income from production may not equal expenditures in the domestic economy overall total income must equal total expenditures Since we are dealing with an open economy we must look to the foreign sector to balance total income with total expenditures Consider the two cases below Income from production Y less Domestic expenditures Z equal Balance on current s account A 1000 900 100 B 900 1000 100 In case A above the economy s income from production exceeds domestic expenditure by 100 but we know that total income must equal total expenditures so there must have been 100 more expenditures than those recorded in GDP transactions This 100 expenditure is recorded in the capital account or the account in the balance of payments which records transactions with the foreign sector The expenditures came from US residents buying real and financial assets owned by foreigners which generated payments to the rest of the world These transactions were for the purchase of existing assets if they were currently produced they would be included in imports In case B above the economy s domestic expenditures are greater than domestic income by 100 for total income to equal total expenditure there must be an additional 100 of income This was caused by US residents selling real and financial assets to foreigners Again these transactions were for the sale of existing assets if they were currently produced they would be included in exports Domestic income less plus Additional transactions equal Total income less total domestic expenditure not recorded in GDP s expenditures 100 100 expenditures 0 B 100 100 income 0 current account capital account Balance of Payments Econ 2105 Principles of Macroeconomics Dr Jon Mans eld Macro Introduction Income from production and expenditures on currently produced goods amp services Expenditures gt Income Income Expenditures Income gt Expenditures Deficit Balance Surplus Payments to Income from Foreign sector Foreign sector M X Capital Inflow Capital Outflow Domestic Markets for currently produced goods and services Domestic Economy Domestic Economy C G I Expenditures by Expenditures by Expenditures by Household sector Government sector Firm sector T Borrowing Financial Markets Econ 2105 Principles of Macroeconomics Dr Jon Mans eld Macro Introduction 7 6 Basic Algebra for the GDP equation Y income from current domestic production real GDP Z domestic spending C I G When a domestic resident sells an existing real or financial asset to someone in the rest of the world this is recorded as Other Income Oi for the domestic economy and as a capital account transaction Ki capital inflow When a domestic resident buys an existing real or financial asset from someone in the rest of the world this is recorded as Other expense Oe for the domestic economy and as a capital account transaction Ko capital outflow Note when a domestic resident sellsbuys an existing asset tofrom another domestic resident it is only a redistribution within the economy no international transaction or one involving GDP Approach 1 GDPequation Y E CIGX M Substitute Y E Z X M domestic foreign Rearrange Y Z 2 X M Other transactions Oi Oe Y Z 2 X M Ki Ko other trans domestic foreign or capital account balance current account Approach 2 GDPequation Y E CIGX M Substitute CST E CIGX M subtract C from both sides S T 2 1 G X M Subtract I from both sides S I T E G X M Subtract G from both S I T G E X M sides domestic foreign Include other transactions Oi Oe S I T G E X M Ki Ko other trans private public foreign capital account Econ 2105 Principles of Macroeconomics Dr Jon Mans eld The Basics of Demand Supply amp Markets Econ 2105 Principles of Macroeconomics Dr Jon Mansfield Behavior of buyers 39 Individual and Market Demand Functions Relationship shows the quantities of a good or service that buyers are willing and able to buy at various prices holding everything else constant ceteris paribus General Demand Function Q f P T Ps Pc E N demand shift parameters P The amount demanded quantity demanded depends on o P price of the good or service A B o T tastes and preferences P0 l income normal good inferior good Ps price of substitute goods Pc price of complementary goods D0 D1 E expectations of future prices N number of consumers in the market Q5 Qb Qd A change in price causes a movement along a given demand curve A change in any other variable in the general demand function causes a shift of a demand curve For example when income increases for a normal good everything else held constant the demand curve will shift out Another way of stating this is an increase in Qd at every price moving from A to B at P0 and also at every other price The Basics of Demand Supply amp Markets Behavior of Firms producers sellers suppliers Individual and Market Supply Functions Relationship shows the quantities of a good or service that firms are willing and able to produce at various prices holding everything else constant ceteris paribus General Supply Function Qs f P Tx Pi E N supply shift parameters P So 51 The amount supplied quantity supplied depends on A B o P price of the good or service P T technology Pi prices of inputs resources E expectations of future prices N number of producers in the market Qa Qb Q A change in price causes a movement along a given supply curve A change in any other variable in the general supply function causes a shift of a supply curve For example when resource prices decrease everything else held constant the supply curve will shift out Another way of stating this is an increase in Qs at every price moving from A to B at P0 and also at every other price Econ 2105 Principles of Macroeconomics Dr Jon Mans eld The Basics of Demand Supply amp Markets Market Equilibrium Changes in Equilibrium a state of balance between opposing economic forces the behavior of consumers is consistent with the behavior of firms intersection of Demand and Supply curves QdQs P C so P1 A B P0 D1 D0 100 150 200 Q P D0 5 51 A B P0 c 1 P 100 150 200 SO D0 100 Q Increase Income for a normal good At each price the quantity demanded increases the demand curve shifts out to D At the original equilibrium price there is now excess demand Qs 100 and Qd 200 Consumers start to bid up the price As the price rises Qs increases moving up along the supply curve from A to C and Qd decreases moving up anngthe new demand curve from B to C Equilibrium is restored at a higher price and a higher than the original quantity Increase in Technology At each price the quantity supplied increases the supply curve shifts out to 81 At the original equilibrium price there is now excess supply Qd 100 and Qs 200 Firms start to lower the price As the price falls Qd increases moving down along the demand curve from A to C and Qs decreases moving down anngthe new supply curve from B to C Equilibrium is restored at a lower price and a higher than the original quantity Econ 2105 Principles of Macroeconomics Dr Jon Mans eld
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