MACROECONOMIC BACKGROUND 1 M.Pourhosseini

MACROECONOMIC BACKGROUND IN THIS TUTORIAL WE REVIEW SOME BASIC MACROECONOMIC AGGREGATESIN THIS TUTORIAL WE REVIEW SOME BASIC MACROECONOMIC AGGREGATES The purpose is to provide the students whose first degree is not economics with some basic toolsThe purpose is to provide the students whose first degree is not economics with some basic tools AGGREGATE DEMANDAGGREGATE DEMAND INJECTIONSINJECTIONS WITHDRWALSWITHDRWALS CONSUMPTIONCONSUMPTION TAXESTAXES IMPORTSIMPORTS EXPORTSEXPORTS

aggregate demand Defining aggregate demand and national income This background is based on the KEYNESIAN THEORYThis background is based on the KEYNESIAN THEORY The 45° line diagram: the significance of the 45° line Defining aggregate demand and national income This background is based on the KEYNESIAN THEORYThis background is based on the KEYNESIAN THEORY The 45° line diagram: the significance of the 45° line

The 45 The 45  line O C d, W, J Y C d + W (=Y)

O C d, W, J Y C d + W (=Y) £100bn The 45 The 45  line

BACKGROUND TO KEYNESIAN THEORY Defining aggregate demand and national income The 45° line diagram: the significance of the 45° line Consumption – –the consumption function Defining aggregate demand and national income The 45° line diagram: the significance of the 45° line Consumption – –the consumption function

The consumption function Consumption (£bn) Y C Y (£bn)

Consumption (£bn) Y C Y (£bn) 50 The consumption function

BACKGROUND TO KEYNESIAN THEORY Defining aggregate demand and national income The 45° line diagram: the significance of the 45° line Consumption – –the consumption function – –the mpc Defining aggregate demand and national income The 45° line diagram: the significance of the 45° line Consumption – –the consumption function – –the mpc

Consumption (£bn) Y C Y (£bn) 50 The consumption function

Consumption (£bn) Y C Y (£bn) 50  C = 8  Y = 10 mpc =  C /  Y = 8/10 = 0.8 The consumption function

Different consumption functions (a) Consumption (£bn) Y C1C1 Y (£bn)

Different consumption functions (b) Consumption (£bn) Y C2C2 Y (£bn)

Different consumption functions (c) Consumption (£bn) Y C3C3 Y (£bn)

Different consumption functions (d) Consumption (£bn) Y C4C4 Y (£bn)

BACKGROUND TO KEYNESIAN THEORY Defining aggregate demand and national income The 45° line diagram: the significance of the 45° line Consumption – –the consumption function – –the mpc – –other determinants of consumption Defining aggregate demand and national income The 45° line diagram: the significance of the 45° line Consumption – –the consumption function – –the mpc – –other determinants of consumption

BACKGROUND TO KEYNESIAN THEORY Defining aggregate demand and national income The 45° line diagram: the significance of the 45° line Consumption – –the consumption function – –the mpc – –other determinants of consumption – –short-run and long-run consumption functions Defining aggregate demand and national income The 45° line diagram: the significance of the 45° line Consumption – –the consumption function – –the mpc – –other determinants of consumption – –short-run and long-run consumption functions

Long-run and short-run consumption functions Consumption (£bn) Y C long run Y (£bn) C now

Consumption (£bn) Y C long run Y (£bn) C now C 5 years’ time Long-run and short-run consumption functions

Consumption (£bn) Y C long run Y (£bn) C now C 5 years’ time C 10 years’ time Long-run and short-run consumption functions

BACKGROUND TO KEYNESIAN THEORY Defining aggregate demand and national income The 45° line diagram: the significance of the 45° line Consumption – –the consumption function – –the mpc – –other determinants of consumption – –short-run and long-run consumption functions – –the consumption of domestically produced goods Defining aggregate demand and national income The 45° line diagram: the significance of the 45° line Consumption – –the consumption function – –the mpc – –other determinants of consumption – –short-run and long-run consumption functions – –the consumption of domestically produced goods

The consumption of domestic product Consumption (£bn) Y C Y (£bn)

The consumption of domestic product Consumption (£bn) Y C Y (£bn) CdCd

BACKGROUND TO KEYNESIAN THEORY Withdrawals – –net saving: the saving function   the mps Withdrawals – –net saving: the saving function   the mps

The net saving function: (a) linear O Saving Y C d + W (=Y)

The net saving function: (a) linear O Saving Y C d + W (=Y) S

The net saving function: (b) non-linear O Saving Y C d + W (=Y) S

BACKGROUND TO KEYNESIAN THEORY Withdrawals – –net saving: the saving function   the mps   determinants of saving Withdrawals – –net saving: the saving function   the mps   determinants of saving

Household saving as % of personal disposable income Source: Datastream

BACKGROUND TO KEYNESIAN THEORY Withdrawals – –net saving: the saving function   the mps   determinants of saving – –net taxes: tax functions   the mpt Withdrawals – –net saving: the saving function   the mps   determinants of saving – –net taxes: tax functions   the mpt

The aggregate net tax function: (a) lump-sum tax O Taxes Y C d + W (=Y)

The aggregate net tax function: (a) lump-sum tax O Taxes Y C d + W (=Y) T

The aggregate net tax function: (b) proportional taxes O Y C d + W (=Y) T Taxes

The aggregate net tax function: (c) progressive taxes O Y C d + W (=Y) T Taxes

The aggregate net tax function: (d) regressive taxes O Y C d + W (=Y) T Taxes

BACKGROUND TO KEYNESIAN THEORY Withdrawals – –net saving: the saving function   the mps   determinants of saving – –net taxes: tax functions   the mpt   expenditure taxes & C d Withdrawals – –net saving: the saving function   the mps   determinants of saving – –net taxes: tax functions   the mpt   expenditure taxes & C d

BACKGROUND TO KEYNESIAN THEORY Withdrawals – –net saving: the saving function   the mps   determinants of saving – –net taxes: tax functions   the mpt   expenditure taxes & C d – –imports: import functions Withdrawals – –net saving: the saving function   the mps   determinants of saving – –net taxes: tax functions   the mpt   expenditure taxes & C d – –imports: import functions

BACKGROUND TO KEYNESIAN THEORY Withdrawals – –net saving: the saving function   the mps   determinants of saving – –net taxes: tax functions   the mpt   expenditure taxes & C d – –imports: import functions   the mpm Withdrawals – –net saving: the saving function   the mps   determinants of saving – –net taxes: tax functions   the mpt   expenditure taxes & C d – –imports: import functions   the mpm

The import function: (a) imports with low income elasticity of demand O Y C d + W (=Y) Expenditure on Imports

The import function: (a) imports with low income elasticity of demand O Y C d + W (=Y) M Expenditure on Imports

The import function: (a) imports with high income elasticity of demand O Y C d + W (=Y) M Expenditure on Imports

BACKGROUND TO KEYNESIAN THEORY Withdrawals – –net saving: the saving function;   the mps   determinants of saving – –net taxes: tax functions;   the mpt   expenditure taxes & C d – –imports: import functions;   the mpm   effect of imports on C d Withdrawals – –net saving: the saving function;   the mps   determinants of saving – –net taxes: tax functions;   the mpt   expenditure taxes & C d – –imports: import functions;   the mpm   effect of imports on C d

BACKGROUND TO KEYNESIAN THEORY Withdrawals – –net saving: the saving function;   the mps   determinants of saving – –net taxes: tax functions;   the mpt   expenditure taxes & C d – –imports: import functions;   the mpm   effect of imports on C d – –the withdrawals function Withdrawals – –net saving: the saving function;   the mps   determinants of saving – –net taxes: tax functions;   the mpt   expenditure taxes & C d – –imports: import functions;   the mpm   effect of imports on C d – –the withdrawals function

BACKGROUND TO KEYNESIAN THEORY Withdrawals – –net saving: the saving function;   the mps   determinants of saving – –net taxes: tax functions;   the mpt   expenditure taxes & C d – –imports: import functions;   the mpm   effect of imports on C d – –the withdrawals function   the mpw Withdrawals – –net saving: the saving function;   the mps   determinants of saving – –net taxes: tax functions;   the mpt   expenditure taxes & C d – –imports: import functions;   the mpm   effect of imports on C d – –the withdrawals function   the mpw

The W and C d functions O Y C d + W (=Y) C d, W

The W and C d functions O Y C d + W (=Y) W C d, W

O Y C d + W (=Y) W C d, W The W and C d functions CdCd

O Y C d + W (=Y) W C d, W CdCd The W and C d functions

BACKGROUND TO KEYNESIAN THEORY Injections – –investment   increased consumer demand   expectations   cost and efficiency of capital   rate of interest – –government expenditure – –exports – –the injections function Injections – –investment   increased consumer demand   expectations   cost and efficiency of capital   rate of interest – –government expenditure – –exports – –the injections function

THE DETERMINATION OF NATIONAL INCOME Equilibrium national income – –withdrawals equal injections Equilibrium national income – –withdrawals equal injections

Deriving equilibrium national income O Y W C d, W, J J

O Y W J Y1Y1 b a Deriving equilibrium national income

O Y W C d, W, J J Y2Y2 d c Deriving equilibrium national income

O Y W C d, W, J J YeYe x Deriving equilibrium national income

THE DETERMINATION OF NATIONAL INCOME Equilibrium national income – –withdrawals equal injections – –income equals expenditure Equilibrium national income – –withdrawals equal injections – –income equals expenditure

O Y W C d, W, J J Deriving equilibrium national income

O Y W C d, W, J J CdCd Deriving equilibrium national income

O Y Y = C d + W W C d, W, J J CdCd Deriving equilibrium national income

O Y W C d, W, J J CdCd Y = C d + W E = C d + J Deriving equilibrium national income

O Y W C d, W, J J CdCd Y = C d + W E = C d + J Y1Y1 f e Deriving equilibrium national income

O Y W C d, W, J J CdCd Y = C d + W E = C d + J Y2Y2 h g Deriving equilibrium national income

O Y W C d, W, J J CdCd Y = C d + W E = C d + J YeYe x z Deriving equilibrium national income