Chapter 3:The Goods Market o 3-1: The Composition of GDP e3-2: The demand for goods 3-3:The Determination of Equilibrium Output 3-4: Investment Equals Saving: An Alternative Way of Thinking About Goods-Market Equilibrium 93-5: Is the government Omnipotent?A Warning 2003-6-29
2003-6-29 1 Chapter 3:The Goods Market 3-1:The Composition of GDP 3-2:The Demand for Goods 3-3:The Determination of Equilibrium Output 3-4:Investment Equals Saving:An Alternative Way of Thinking About Goods-Market Equilibrium 3-5:Is the Government Omnipotent?A warning
Figure 1: Production, Income, and the Demand for goods Production Income Demand 3-6 29
2003-6-29 2 Figure 1:Production,Income, and the Demand for Goods Production Income Demand
3-1:The Composition of GDP O The first component of gDP is consumption c) INvestment( is sometimes called fixed investment to distinguish it form inventory/ investment Nonresidential investment Residential investment EGovernment spending, G) Not include government transfers ONet exports X-Q)is the difference between exports(X) and imports(Q) O Inventory investment(s) is the difference between goods produced and goods sold in a given year 2003-6-29 3
2003-6-29 3 3-1:The Composition of GDP ●The first component of GDP is consumption,(C) ●Investment (I) is sometimes called fixed investment to distinguish it form inventory investment. •Nonresidential investment • Residential investment ●Government spending,(G) • Not include government transfers ●Net exports(X-Q) is the difference between exports(X) and imports(Q). ●Inventory investment(IS ) is the difference between goods produced and goods sold in a given year
The Composition of U.S GDP1998 Billions of Percent of GDP Dollars GDPY 8509 100 Consumption(c) 5806 68 2 Investment() 1308 15 Nonresidential 939 Residential 369 3 Government Spending(G) 1488 18 4 Net Exports 154 Exports(X) 958 Imports(Q) 1112 -13 5 Inventory Investment(s)61 2003-6-29
2003-6-29 4 The Composition of U.S.GDP,1998 Billions of Dollars Percent of GDP GDP(Y) 1 Consumption(C) 2 Investment(I) Nonresidential Residential 3 Government Spending(G) 4 Net Exports Exports(X) Imports(Q) 5 Inventory Investment(IS ) 8509 5806 1308 939 369 1488 -154 958 -1112 61 100 68 15 11 4 18 -2 11 -13 1
3-2: The Demand for Goods Consumption ( C) ● Investment() P Government(G) 2003-6-29 5
2003-6-29 5 3-2:The Demand for Goods Consumption (C) Investment (I) Government (G)
The demand for oods z≡C+|+G+X-Q If The economy is closed then ●Z三C+|+G 2003-6-29 6
2003-6-29 6 The Demand for Goods Z≡C+I+G+X-Q If The Economy is closed,then Z≡C+I+G
Consumption(c) S CEC(YD 十 Yp is disposable income ●C CotC 0 1YD (3.1) C1 is called the marginal propensity to consume o C is autonomous consume ●YD≡YT ●C=c+c1(YT) (3.2) 2003-6-29 7
2003-6-29 7 Consumption(C) C=C(YD ) (+) ⚫ YD is disposable income C= c0+c1YD (3.1) ⚫ c1 is called the marginal propensity to consume ⚫ c0 is autonomous consume YD ≡ Y-T C=c0+c1 (Y-T) (3.2)
Figure: Consumption and Disposable Income C=Co+CIYD Co Slope=c
Figure: Consumption and Disposable Income C C=c0+c1YD c0 Slope=c1 YD
Investment() (3.3) e we take investment as given here. putting a bar on investment is a simple ty pographical way to remind us that we take investment as given
Investment (I) I = I (3.3) ·we take investment as given here. Putting a bar on investment is a simple typographical way to remind us that we take investment as given
Government(G) ● G describes fiscal policy、 the choice of taxes and spending by the government Government do not behave with the same regularity as consumers or firms. so there is no reliable rule we could write for G or T corresponding to the rule we write for consumption One of the tasks of macroeconomists is to advise governments on spending and tax decisions. That means we do not want to look at a model in which we have already assumed something about their behavior 2003-6-29 10
2003-6-29 10 Government (G) G describes fiscal policy—the choice of taxes and spending by the government. ⚫ Government do not behave with the same regularity as consumers or firms. So there is no reliable rule we could write for G or T corresponding to the rule we write for consumption. ⚫ One of the tasks of macroeconomists is to advise governments on spending and tax decisions. That means we do not want to look at a model in which we have already assumed something about their behavior
