y Chapter 3 The Product Market Analysis Gang Gong March 42002 Copyright Notes: This electronic file is only used as a lecture notes for the student in this class It is not allowed to be used for presentation anywhere else without the permission from the author
Chapter 3: The Product Market Analysis Gang Gong March 4, 2002 Copyright Notes:This electronic file is only used as a lecture notes for the student in this class. It is not allowed to be used for presentation anywhere else without the permission from the author
Introduction The aim of this chapter is to study how 2 output> is determined in Keynesian framework. The analysis in this chapter is often named multiplier analysis
Introduction • The aim of this chapter is to study how output is determined in Keynesian framework. The analysis in this chapter is often named multiplier analysis
p Introduction The key assumption of multiplier analysis is 2p on the demand determined, this is output is purely determined by demand. There is no restriction in the supply side of the economy. The capacity to supply the output as demanded is al ways available. The firms are able and willing to supply any level of output as demanded (at given price? )
Introduction • The key assumption of multiplier analysis is on “the demand determined,” this is “output is purely determined by demand.” There is no restriction in the supply side of the economy. The capacity to supply the output as demanded is always available. The firms are able and willing to supply any level of output as demanded (at given price?)
p Introduction In macroeconomics, aggregate demand (ad) can be defined as the sum of consumption (C), gross investment(D, government expenditure (G) and net export (E-M). c Ad=C++G+E-M2 This is indeed the GDP minus inventory change (n)
Introduction • In macroeconomics, aggregate demand (AD) can be defined as the sum of consumption (C), gross investment (I), government expenditure (G) and net export (E-M). AD = C+I+G+E-M This is indeed the GDP minus inventory change (V)
p Introduction It is more difficult to define the aggregate s 2o2 supply. Generally one simply believes that aggregate supply is a function of economic resources. (labor, capital stock, technology among others)
Introduction • It is more difficult to define the aggregate supply. Generally one simply believes that aggregate supply is a function of economic resources (labor, capital stock, technology among others)
Output in a Private-Closed Economy In this case, the aggregate demand is equal to consumption plus investment: 2 AD=C+
Output in a Private-Closed Economy • In this case, the aggregate demand is equal to consumption plus investment: AD = C + I
Output in a Private-Closed Economy In the followed analysis, we simply assume s 2 that y is equal to O, indicating all output is demanded so that we should allow GDP=C+
Output in a Private-Closed Economy • In the followed analysis, we simply assume that V is equal to 0, indicating all output is demanded, so that we should allow GDP = C + I
Output in a Private-Closed Economy . According to income approach, GDP is also y 2 reflected as income (y) so that we have 2 HIs Y=C+
Output in a Private-Closed Economy • According to income approach, GDP is also reflected as income (Y) so that we have Y = C + I
Output in a Private-Closed Economy Consumption Determination: Consumption y 202 can be divided into two parts. One is income-related consumption and the other is non-income related consumption(often called autonomous consumption). Therefore the consumption function can be written as C=A+CY
Output in a Private-Closed Economy • Consumption Determination: Consumption can be divided into two parts. One is income-related consumption and the other is non-income related consumption (often called autonomous consumption). Therefore the consumption function can be written as C = A + c·Y
Output in a Private-Closed Economy Consumption Determination WR2C-A+C-Y where A can be regarded as autonomous consumption and c Y as the income-related consumption. Note that 1>C>0. This 2 indicates that when income increases. the s consumption will- also increase, but with y p less amount( see figure presented in class)s
Output in a Private-Closed Economy • Consumption Determination: C = A + c·Y where A can be regarded as autonomous consumption and c·Y as the income-related consumption. Note that 1 > c > 0. This indicates that when income increases, the consumption will also increase, but with less amount (see figure presented in class)