Warm-Up Why did boom towns rise in the Old West?

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Presentation transcript:

Warm-Up Why did boom towns rise in the Old West? What happened to them over time? What is the formula for GDP?

Income and Expenditure Chapter 27: Income and Expenditure (pages 704-727)

What is GDP? GDP = C + G + I + (X-M)

MPC + MPS = 1 Consumer Consumption Consumers have disposable income (Yd) Can either spend or save it MARGINAL PROPENSITY TO CONSUME MARGINAL PROPENSITY TO SAVE MPC + MPS = 1

Consumption Schedule $13,000 $0 --- $14,000 $13,800 $200 0.8 0.2 Yd Consumption (C) Savings (S) MPC (DC/DYd) MPS (DS/DYd) $13,000 $0 --- $14,000 $13,800 $200 0.8 0.2 $15,000 $14,500 $500 0.7 0.3 $16,000 $15,100 $900 0.6 0.4 $17,000 $15,600 $1,400 0.5

One person’s spending becomes another person’s income… The Multiplier… One person’s spending becomes another person’s income…

The Multiplier… Consumption grows when MPC > 0 Multiplier =

Consumption Grows… Person MPC Spends Receives Andrew 0.8 $1000 Lilly $800 Marsha $640 Pat $512 Sundreana $409.60 Alex $1,000 led to $2,361.60 in additional spending (and more if we kept going)!!

Work Together to Answer These… Would the multiplier be larger or smaller if you saved more of your additional income? What is the multiplier if MPC = 0.67? How much will GDP change if consumer spending increases by $100 billion (assume MPC = 0.6)?

Multiplier in Real Life…

Causes of Change in Consumption Change in future disposable income Spending  w/ expected  in Yd Opposite if you expect to earn less Change in aggregate wealth  in wealth =  in consumption

Investment Spending & GDP

Investment Spending Impacted by: Interest rate Expected real GDP Current production capacity

Expected Interest Rates Decision to spend balances additional sales with cost of borrowing EXAMPLE: To build a factory or not… Expected return = 5% Interest rate = 7% What if interest = 3% Build or not?

Expected Change in GDP  in real GDP =  in output Investment spending helps meet expected output Faster GDP  =  investment spending

Production Capacity Production capacity = possible output Excess capacity = output < maximum Excess capacity =  investment spending EXAMPLE: 100,000 unit capacity If demand = 50,000 then … What if demand was 125,000 …