Transcript No Slide Title

MACROECONOMIC BACKGROUND 1
M.Pourhosseini
MACROECONOMIC BACKGROUND
• IN THIS TUTORIAL
WE REVIEW SOME
BASIC
MACROECONOMIC
AGGREGATES
• The purpose is to
provide the students
whose first degree is
not economics with
some basic tools
• AGGREGATE
DEMAND
• INJECTIONS
• WITHDRWALS
• CONSUMPTION
• TAXES
• IMPORTS
• EXPORTS
aggregate demand
• Defining aggregate demand and national
income
•
This background is based on the KEYNESIAN THEORY
• The 45° line diagram: the significance of
the 45° line
Cd, W, J
The 45 line
Cd + W (=Y)
O
Y
Cd, W, J
The 45 line
Cd + W (=Y)
£100bn
O
£100bn
Y
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 consumption function
120
Y
C
Consumption (£bn)
100
80
60
40
20
0
0
20
40
60
Y (£bn)
80
100
120
140
The consumption function
120
Y
C
Consumption (£bn)
100
80
60
50
40
20
0
0
20
40
50 60
Y (£bn)
80
100
120
140
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
The consumption function
120
Y
C
Consumption (£bn)
100
80
60
50
40
20
0
0
20
40
50 60
Y (£bn)
80
100
120
140
The consumption function
120
Y
C
Consumption (£bn)
100
DC = 8
80
DY = 10
60
mpc = DC / DY
= 8/10
= 0.8
50
40
20
0
0
20
40
50 60
Y (£bn)
80
100
120
140
Consumption (£bn)
Different consumption functions (a)
120
Y
100
C1
80
60
40
20
0
0
20
40
60
Y (£bn)
80
100
120
140
Different consumption functions (b)
120
Y
Consumption (£bn)
100
C2
80
60
40
20
0
0
20
40
60
Y (£bn)
80
100
120
140
Different consumption functions (c)
120
Y
C3
Consumption (£bn)
100
80
60
40
20
0
0
20
40
60
Y (£bn)
80
100
120
140
Different consumption functions (d)
120
Y
Consumption (£bn)
100
C4
80
60
40
20
0
0
20
40
60
Y (£bn)
80
100
120
140
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
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
Consumption (£bn)
Long-run and short-run consumption functions
120
Y
100
Clong run
80
Cnow
60
40
20
0
0
20
40
60
Y (£bn)
80
100
120
140
Consumption (£bn)
Long-run and short-run consumption functions
120
Y
100
Clong run
80
C5 years’ time
Cnow
60
40
20
0
0
20
40
60
Y (£bn)
80
100
120
140
Consumption (£bn)
Long-run and short-run consumption functions
120
Y
100
Clong run
C10 years’ time
C5 years’ time
80
Cnow
60
40
20
0
0
20
40
60
Y (£bn)
80
100
120
140
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
The consumption of domestic product
120
Y
C
Consumption (£bn)
100
80
60
40
20
0
0
20
40
60
Y (£bn)
80
100
120
140
The consumption of domestic product
120
Y
C
Consumption (£bn)
100
80
Cd
60
40
20
0
0
20
40
60
Y (£bn)
80
100
120
140
BACKGROUND TO KEYNESIAN THEORY
• Withdrawals
– net saving: the saving function
 the
mps
The net saving function: (a) linear
Saving
Cd + W (=Y)
O
Y
The net saving function: (a) linear
Saving
Cd + W (=Y)
S
O
Y
The net saving function: (b) non-linear
Saving
Cd + W (=Y)
S
O
Y
BACKGROUND TO KEYNESIAN THEORY
• Withdrawals
– net saving: the saving function
 the
mps
 determinants of saving
Household saving as % of personal disposable income
198185
198690
199195
19962000
Belgium
16.5
15.0
18.8
15.0
France
15.9
11.6
13.8
14.2
Germany
12.0
12.9
12.2
11.1
Italy
21.4
17.2
15.8
11.9
Japan
16.5
13.5
13.3
14.9
Netherlands
1.0
3.3
1.1
0.0
Sweden
2.7
2.4
6.7
1.9
UK
4.8
5.1
10.5
9.9
USA
8.3
5.4
4.7
1.6
Source: Datastream
BACKGROUND TO KEYNESIAN THEORY
• 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
Taxes
Cd + W (=Y)
O
Y
The aggregate net tax function: (a) lump-sum tax
Taxes
Cd + W (=Y)
T
O
Y
The aggregate net tax function: (b) proportional taxes
Taxes
Cd + W (=Y)
T
O
Y
The aggregate net tax function: (c) progressive taxes
Taxes
Cd + W (=Y)
T
O
Y
The aggregate net tax function: (d) regressive taxes
Taxes
Cd + W (=Y)
T
O
Y
BACKGROUND TO KEYNESIAN THEORY
• Withdrawals
– net saving: the saving function
 the
mps
 determinants of saving
– net taxes: tax functions
 the
mpt
 expenditure taxes & Cd
BACKGROUND TO KEYNESIAN THEORY
• Withdrawals
– net saving: the saving function
 the
mps
 determinants of saving
– net taxes: tax functions
 the
mpt
 expenditure taxes & Cd
– 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 & Cd
– imports: import functions
 the
mpm
The import function: (a) imports with low income elasticity of demand
Expenditure on Imports
Cd + W (=Y)
O
Y
The import function: (a) imports with low income elasticity of demand
Expenditure on Imports
Cd + W (=Y)
M
O
Y
The import function: (a) imports with high income elasticity of demand
Expenditure on Imports
Cd + W (=Y)
M
O
Y
BACKGROUND TO KEYNESIAN THEORY
• Withdrawals
– net saving: the saving function;
 the
mps
 determinants of saving
– net taxes: tax functions;
 the
mpt
 expenditure taxes & Cd
– imports: import functions;
 the
mpm
 effect of imports on Cd
BACKGROUND TO KEYNESIAN THEORY
• Withdrawals
– net saving: the saving function;
 the
mps
 determinants of saving
– net taxes: tax functions;
 the
mpt
 expenditure taxes & Cd
– imports: import functions;
 the
mpm
 effect of imports on Cd
– 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 & Cd
– imports: import functions;
 the
mpm
 effect of imports on Cd
– the withdrawals function
 the
mpw
Cd, W
The W and Cd functions
Cd + W (=Y)
O
Y
Cd, W
The W and Cd functions
Cd + W (=Y)
W
O
Y
Cd, W
The W and Cd functions
Cd + W (=Y)
Cd
W
O
Y
Cd, W
The W and Cd functions
Cd + W (=Y)
100
Cd
70
W
30
O
100
Y
BACKGROUND TO KEYNESIAN THEORY
• 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
Deriving equilibrium national income
Cd, W, J
W
J
O
Y
Deriving equilibrium national income
Cd, W, J
W
a
J
b
O
Y1
Y
Deriving equilibrium national income
Cd, W, J
W
c
d
O
Y2
J
Y
Deriving equilibrium national income
Cd, W, J
W
x
J
O
Ye
Y
THE DETERMINATION OF NATIONAL INCOME
• Equilibrium national income
– withdrawals equal injections
– income equals expenditure
Deriving equilibrium national income
Cd, W, J
W
J
O
Y
Deriving equilibrium national income
Cd, W, J
Cd
W
J
O
Y
Deriving equilibrium national income
Cd, W, J
Y = Cd + W
Cd
W
J
O
Y
Deriving equilibrium national income
Cd, W, J
Y = Cd + W
E = Cd + J
C
d
W
J
O
Y
Deriving equilibrium national income
Cd, W, J
Y = Cd + W
E = Cd + J
Cd
e
W
f
J
O
Y1
Y
Deriving equilibrium national income
Cd, W, J
Y = Cd + W
E = Cd + J
g
h
Cd
W
J
O
Y2
Y
Deriving equilibrium national income
Cd, W, J
Y = Cd + W
E = Cd + J
C
z
d
W
x
O
Ye
J
Y