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Chapter 25 aggregate demand and the powerful consumer
1.
PowerPoint Slides prepared
by: Andreea CHIRITESCU Eastern Illinois University 1© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Aggregate Demand and the Powerful Consumer Men are disposed, as a rule and on the average, to increase their consumption as their income increases, but not by as much as the increase in their income. JOHN MAYNARD KEYNES
2.
Aggregate Demand • Aggregate
demand –Total amount that all • Consumers • Business firms • Government agencies • Foreigners –Spend on final goods and services –Is a schedule, not a fixed number • The numerical value depends on the price level 2© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
3.
Aggregate Demand • Components
of aggregate demand –Consumer expenditure (C, consumption) –Investment spending (I) –Government purchases (G) –Net exports (X-IM) 3© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
4.
Aggregate Demand • C
- Consumer expenditure / consumption –Total amount spent by consumers –On newly produced goods and services • Excluding purchases of new homes –2/3 of total spending 4© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5.
Aggregate Demand • I
- Investment spending –Sum of expenditures of business firms • On new plant, equipment, and software –And households on new homes –Not included • Financial “investments” • Re-sales of existing physical assets 5© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6.
Aggregate Demand • G
- Government purchases –All the goods and services purchased by all levels of government • X-IM - Net exports –Difference between exports (X) and imports (IM) • Aggregate demand C + I + G + (X-IM) 6© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7.
National Income • National
income –Sum of the incomes –That all individuals in the economy earn • In the forms of wages, interest, rents, and profits –Excludes government transfer payments –Is calculated before any deductions are taken for income taxes 7© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
8.
National Income • Disposable
income (DI) –Sum of the incomes of all individuals in the economy –After all taxes have been deducted and all transfer payments have been added –How much consumers have available to spend and save 8© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9.
National Income • Transfer
payments –Sums of money –That the government gives certain individuals as outright grants • Rather than as payments for services rendered to employers –Examples • Social Security and unemployment benefits 9© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
10.
Circular Flow • Disposable
income, DI = C+S –Consumption (C) –Savings (S) • “Leakages” –S, IM, Taxes • “Injections” –I, G, X, Transfers 10© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
11.
Figure 1 The Circular
Flow of Expenditures and Income 11© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
12.
Circular Flow • Aggregate
demand = C+I+G+(X-IM) = Gross national income • National income = Domestic product • DI =GDP - Taxes + Transfer Payments =GDP - (Taxes – Transfers) =Y - T 12© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
13.
Consumer Spending and
Income • Consumer spending - responds –Change in income taxes • If DI increases –C – increases • If DI decreases –C – falls 13 changeHorizontal changeVertical Slope = © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
14.
Figure 2 Consumer Spending
and Disposable Income 14© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15.
Consumer Spending and
Income • Scatter diagram – graph –Graph showing the relationship between two variables –Each year: a point in the diagram • Coordinates of each year’s point: values of the two variables in that year 15© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
16.
Figure 3 Scatter Diagram
of Consumer Spending and Disposable Income 16© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
17.
Figure 4 Scatter Diagram
of Consumer Spending and Disposable Income, 1947–1963 17© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
18.
The C Function
and the MPC • Consumption function, C –Relationship between • Total consumer expenditures • Total disposable income in the economy –Holding all other determinants of consumer spending constant 18© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
19.
The C Function
and the MPC • Marginal propensity to consume (MPC) –Ratio of changes in consumption to changes in disposable income –Slope of consumption function –How much more consumers will spend if DI rises by $1 19© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. CinchangetheproducesthatDIinChange CinChange =MPC
20.
The C Function
and the MPC • To estimate the initial effect of a tax cut on consumer spending –Estimate the MPC –Multiply the amount of the tax cut by the estimated MPC –Prediction – subject to some margin of error 20© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21.
Table 1 Consumption and
Income in a Hypothetical Economy 21© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
22.
Figure 5 A Consumption
Function 22 C 2,700 3,000 3,300 3,600 3,900 RealConsumerSpending,C $4,200 3,200 3,600 4,0000 4,400 4,800 Real Disposable Income, DI 5,200 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
23.
Factors that Shift
the C Function • Movement along a given C function –Change in disposable income • Shift of the C function –Change in other determinants of C • Wealth • Price level • Real interest rate • Future income expectations 23© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
24.
Figure 6 Shifts of
the Consumption Function 24 C0 RealConsumerSpending Real Disposable Income A C2 C1 Movements along consumption function Shifts of consumption function © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
25.
Factors that Shift
the C Function • Wealth –Stock market wealth • Higher stock prices – increase in C function –Houses • Lower price of houses – fall in C function • Price level –Higher price level – lower purchasing power of money-fixed assets 25© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
26.
Factors that Shift
the C Function • Real interest rate –Interest rates have negligible effects on consumption decisions • Future income expectations –Permanent cuts in income taxes cause greater increases in consumer spending • Than do temporary cuts of equal magnitude 26© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
27.
Table 2 Incomes of
Three Consumers 27© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
28.
The Extreme Variability
of I • Investment spending (I) –The most volatile component of aggregate demand • Business investment – influenced by –Interest rates –Tax provisions –Technical change –Strength of economy –State of business confidence 28© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
29.
The Extreme Variability
of I • Investment in housing – influenced by –Consumer incomes –Interest rates –Interest rates on home mortgages –Expected rate of price appreciation (or depreciation) 29© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
30.
Determinants of Net
Exports • Exports, X –Foreign purchases of U.S. goods • Imports, IM –Portion of domestic demand that is satisfied by foreign producers • Net exports –Exports minus Imports 30© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
31.
Determinants of Net
Exports • Changes in national income –Our GDP rises • Our imports rise –Our GDP falls • Our imports fall –Our exports • Relatively insensitive to our GDP • Sensitive to the GDPs of other countries 31© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
32.
Determinants of Net
Exports • Relative prices and exchange rates –Prices increase • Net exports decrease –Prices decline • Net exports increase –Foreign prices increase • Net exports increase –Foreign prices decrease • Net exports decrease 32© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
33.
How Predictable is
AD? • Aggregate demand – difficult to predict –Consumption • Wealth, stock market • Future prices, income tax law –Investment • Business confidence, expectations –Government purchases • Politics, military and national security events –Net exports • Development abroad 33© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
34.
Appendix National income accounting •
National income accounting –System of measurement devised for collecting and expressing macroeconomic data • Gross domestic product (GDP) –Sum of money values –All final goods and services –Produced over a specified period of time • Usually one year 34© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
35.
Appendix GDP – exceptions
to the rule • Government output –Valued at cost of inputs • Inventories –Counted in GDP • Investment goods –Intermediate goods –Included in GDP 35© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
36.
Appendix GDP: sum of
final goods and services • Y = C + I + G + (X – IM) • I = Gross private domestic investment –Business investment –Residential construction –Inventory investment –Includes only newly produced capital goods –Doesn’t include exchanges of existing assets 36© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
37.
Appendix GDP: sum of
final goods and services • Y = C + I + G + (X – IM) • G = Government purchases –Current goods and services –Purchased by all levels of government –Don’t include transfer payments 37© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
38.
Appendix GDP: sum of
final goods and services • Nation’s total output Y=C+I+G+(X-IM) –Shares of GDP used up by • Consumers (C) • Investors (I) • Government (G) • Foreigners (X-IM) 38© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
39.
Table 3 Gross Domestic
Product in 2009 as the Sum of Final Demands 39© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
40.
Appendix GDP: sum of
all factor payments • GDP = National income –Add up all income in the economy –GDP = Wages + Interest + Rents + Profits –Includes indirect business taxes –Excludes transfer payments –No deduction for income taxes 40© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
41.
Table 4 Gross Domestic
Product in 2009 as the Sum of Incomes 41© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
42.
Appendix GDP: sum of
all factor payments • Net national product (NNP) –A measure of production –Is conceptually identical to national income • Gross national product (GNP) –NNP plus depreciation • Depreciation –Portion of capital equipment used up 42© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
43.
Appendix GDP: sum of
value added • Value added by a firm –Revenue from selling a product –Minus amount paid for goods and services purchased from other firms • GDP = sum of values added by all firms • Value added = Wages + Interest + Rents + Profits 43© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
44.
Table 5 An Illustration
of Final and Intermediate Goods 44© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
45.
Table 6 An Illustration
of Value Added 45© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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