1. MACROECONOMIC BACKGROUND 1 M.Pourhosseini

2. 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

3. 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

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

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

6. 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

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

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

9. 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

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

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

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

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

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

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

16. 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

17. 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

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

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

20. 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

21. 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

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

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

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

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

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

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

28. 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

29. Household saving as % of personal disposable income Source: Datastream

30. 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

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

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

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

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

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

36. 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

37. 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

38. 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

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

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

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

42. 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

43. 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

44. 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

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

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

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

48. O Y C d + W (=Y) W C d, W CdCd 100 70 30 The W and C d functions

49. 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

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

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

52. O Y W J Y1Y1 b a Deriving equilibrium national income

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

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

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

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

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

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

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

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

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

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