CHAPTER 12 Measuring Economic Activity

1. Components of aggregate expenditures C + I + G + (X-M) 2. Personal Consumption Expenditures (C) Factors affecting consumption Relation between consumption and income MPC, MPS 3. Gross Private Domestic Investment (I) Factors affecting (I) Investment function Chapter Outline

4. Government Expenditures Fiscal Policy Government function 5. Net Exports Exports, Imports and net exports function 6. Aggregate expenditure function Equilibrium level of income and output 7. Changes in equilibrium Chapter Outline Cont…

Short-run Model Y= C + I + G + (X-M) ~ open economy Y= C + I + G ~ Keynesian framework The Focus is on the short-run. “In the long-run, we are all dead” -Keynes The theory was developed after the Great Depression

Consumption Function Factors affecting personal consumption C= f [ Y, T p, r, CC, W, CR, D] Y= disposable income T p = personal taxes r = real interest rate CC = consumer confidence W = wealth CR = availability of consumer credit How are these Variables related to consumption?

Y C C C C MPC= C Y < 1

Gross Private Domestic Investment Induced Investment Keynes assumed autonomous Investment Autonomous Investment I I C Y I Y

Government Expenditures Y G G Autonomous Government Expenditures

Net exports & Currency exchange rate m Exports – Autonomous Imports – a funtion of domestic real Imports Exports M= M 0 + m 1 Y M N= [ E-M]

Aggregate Expenditures C + I + G + (X-M) 45 o A E Y Y E O Assumes that consumption is the only component that varies with income. Equilibrium= E=Y Agg. Exp=Agg. output Planned and unplanned inventories

Change in Equilibrium Y I O A B Y E1E1 E2E2 Y

Multiplier Relation between change in investment and change in income M= Y I Y = m * I Multiplier can be defined as : m= 1/1-MPC