Transcript Burda & Wyplosz. Macroeconomics. 4th edn

Burda & Wyplosz
MACROECONOMICS
Chapter 6
Private Sector Demand:
Consumption and
Investment
© Oxford University Press, 2005. All rights reserved.
4th edn
Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.01
Variability of GDP Components, 1970-2001
14%
12%
USA
euro area
10%
8%
6%
4%
2%
0%
C/Y
I/Y
G/Y
Consumption
Investment
Government
Consumption
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Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.02(a)
Consumption tomorrow
Indifference curves: Normal case
0
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Consumption today
Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.02(b)
Consumption tomorrow
Indifference curves: Zero substitution
0
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Consumption today
Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.02(c)
Consumption tomorrow
Indifference curves: Constant substitution
0
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Consumption today
Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.03
Consumption tomorrow
Optimal consumption: borrower
D
(i) Consumption today
financed on credit
M
Y2
(ii) Consumption loan
repayment (including
interest)
(ii)
R
C2
(i)
0
Y1
IC1
-(1+r)
C1
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B
IC2
IC3
Consumption today
Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.03
Consumption tomorrow
Optimal consumption: lender
D
(i) Saving from this period’s
income
(ii) Additional consumption
next period
R
C2
(ii)
Y2
A
(i)
-(1+r)
0
C1
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Y1 B
IC1
IC2
IC3
Consumption today
Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.04
Life-cycle consumption
Income,
Consumption
Income
Saving
Permanent
income
Consumption
Borrowing
0
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Time
Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.05
Consumption tomorrow
Temporary vs. permanent income change
D´
Temporary: R to R´
D
Permanent: R to R´´
A´´R´´
Y2´
Y2
0
R´
A´
A=R
Y1
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Y1´ B
B´ B´´
Consumption today
Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.06
Real GDP and retail sales growth:
Czech Republic, 1997-2002
12
Growth in real GDP and sales
(% per annum)
10
8
6
4
2
0
-2
-4
-6
-8
-10
Q 1/1997
Q 1/1998
Q 1/1999
Q 1/2000
Retail sales
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Q 1/2001
real GDP
Q 1/2002
Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.07
Real price of crude oil, 1956-2002
450
400
Index (1995=100)
350
300
250
200
150
100
50
0
1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000
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Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.08
Current accounts in three countries, 1956-2002
8
Netherlands
6
Denmark
United Kingdom
4
2
0
-2
-4
-6
1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000
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Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.09
D
A
R
R´
B´
B
Consumption today
(a) Student Crusoe
(borrower)
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Consumption tomorrow
Consumption tomorrow
Effect of an increase in the interest rate: negative
income effect for borrowers, positive for lenders
D
R´
R
A
B´ B
Consumption today
(b) Professional athlete
(lender)
Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.10
Consumption, wealth and disposable income:
France, 1980-2002
Consumption and Disposable Income
1300
1300
1200
1200
Consumption (Euro bn.)
Consumption ( Euro bn.)
Consumption and Net Wealth
1100
1000
900
800
700
600
500
1100
1000
900
800
700
600
500
400
400
300
1000
300
400
3000
5000
7000
Net wealth (Euro bn.)
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9000
600
800
1000
1200
1400
Disposable income (Euro bn.)
Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.11
Consumption tomorrow
With a credit constraint, the choice set is
reduced.
C
A
R
0
B
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D
Consumption today
Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.12
GDP, domestic demand and the current account:
Poland and East Germany
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Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.13
Y =F(K )
R
OutputOutput
Optimal
capital stock
slope
= 1+r
K
K
Capital stock
Marginal productivity
of capital
Marginal cost of capital
1+r
MPK
K
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K
Capital stock
Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.14
New
R
Output
Output
Old
slope
= 1+r
K
K
Capital stock
Marginal productivity
of capital
1+r
MPK´
MPK
K
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K
Capital stock
Technological
progress makes
more output
possible with the
same capital
stock. Desired
capital stock
increases.
Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.15
Investment
The q-theory of investment
0
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1
Tobin’s q
Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.16(a)
Investment and Tobin’s q:
a)Tobin's q and Investment in Germany, 1925Inter-war
Germany
1935
140.0
Index (1927=100)
120.0
100.0
80.0
60.0
40.0
20.0
0.0
1925:01
1927:01
1929:01
1931:01
1933:01
1935:01
Year
Real stock prices
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Production of capital goods
Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.16(b)
Investment
and Tobin’s
q: in
b) Tobin's
q and Investment
Spending
Germany,Germany
1970-2002
Modern
500
3.000
2.500
400
350
2.000
300
250
1.500
200
1.000
150
100
0.500
50
0
0.000
1970
1974
1978
1982
1986
1990
1994
Year
Real investment
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Real stock prices
1998
2002
Real stock prices
(1995=1.00)
Investment (bn euros)
450
Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.17
Present value of MPK,
cost of capital
Tobin’s q=1 in a world of no adjustment costs
If there were no costs of
adjustment, the present value
of the marginal cost of capital
would be independent of the
investment rate.
C
1
MPK1
(I K )
Investment rate (I/K)
(a)
Note if there were no
depreciation, the investment
rate, I/K, = DK/K, the rate of
change of the capital stock.
MPK=Marginal return of new investment
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Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.17
Present value of MPK,
cost of capital
Tobin’s q when adjustment costs are significant
Marginal cost
of investment
q1
A
C
1
MPK1
(I K ) (I K )
However the faster we try to
install new capital, the more it
adds to the cost of that capital.
“Haste makes waste.” Hence
the upward slope of the
marginal cost of investment
with respect to the investment
rate.
Investment rate (I/K)
(a)
MPK=Marginal return of new investment
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Burda & Wyplosz
MACROECONOMICS 4/e
Fig. 6.17
With the investment rate
corresponding to the rate
at point A, in the following
period there will be more
capital and a lower MPK.
The investment rate next
period will fall too (as will
Tobin’s q), ultimately
heading toward a value of
unity and no more
investment.
Present value of MPK,
cost of capital
Tobin’s q
Marginal cost
of investment
q
1
q2
A
B
1
MPK2
(I K )2
MPK1
(I K )1
Investment rate (I/K)
(b)
MPK=Marginal return of new investment
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