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ch03 5e
ch03 5e
The Goods
Goods Market
Market
CHAPTER 3
Prepared by:
Fernando Quijano and Yvonn Quijano
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
GDP (Y)
13,246
100.0
Consumption (C)
9,269
70.0
Investment (I)
2,163
16.3
Nonresidential
Residential
Percent of GDP
1,396
10.5
767
5.8
2,528
19.0
Net exports
763
5.8
Exports (X)
1,466
11.0
Imports (IM)
2,22
9
16.8
Inventory investment
49
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E x p o r ts = im p o r ts
tr a d e b a la n c e
E x p o r ts > im p o r ts
tr a d e s u r p lu s
E x p o r ts < im p o r ts
tr a d e d e fic it
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Z C I G X IM
The symbol means that this equation is an identity, or definition.
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Z C I G
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C C (Y D )
( )
C c 0 c 1Y D
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YD Y T
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C C (Y D )
YD Y T
C c 0 c1 (Y T )
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I I
Government Spending (G)
Government spending, G, together with taxes, T, describes fiscal
policythe choice of taxes and spending by the government.
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Z C I G
Then:
Z c0 c1 Y - T I G
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Y Z
Y c0 c1 (Y T ) I G
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Y c0 c1Y c1T I G
Move
1 c Y c
Chapter 3: The Goods Market
I G c1T
(1 c1 ) :
1
c0 I G c1T
Y
1 c1
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1 c1
1
1 c1
[c 0 I G c1T ]
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Figure 3 - 2
Equilibrium in the Goods
Market
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An increase in autonomous
spending has a more than onefor-one effect on equilibrium
output.
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Using a Graph
The first-round increase in
demand, shown by the
distance AB equals $1
billion.
This first-round increase
in demand leads to an
equal increase in
production, or $1 billion,
which is also shown by
the distance in AB.
This first-round increase
in production leads to an
equal increase in income,
shown by the distance in
BC, also equal to $1
billion.
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Using a Graph
The second-round increase
in demand, shown by the
distance in CD, equals $1
billion times the propensity
to consume.
This second-round increase
in demand leads to an equal
increase in production, also
shown by the distance DC,
and thus an equal increase
in income, shown by the
distance DE.
The third-round increase in
demand equals $c1 billion,
times c1, the marginal
propensity to consume; it is
equal to $c1 x c1 = $
c12billion.
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1 + c1 + c12 + + c1n
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Table 1
(3) Forecast
Error for c0
(4) Index of
Consumer
Confidence
105
Quarter
(1) Change
in Real GDP
1990:2
19
17
23
1990:3
29
57
90
1990:4
63
88
37
61
1991:1
31
27
30
65
1991:2
27
47
77
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S YD C
S Y T C
Y C I G
Y T C I G T
S I G T
I S (T G )
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I S (T G )
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S Y T C
S Y T c0 c1 (Y T )
S c 0 (1 c 1 )(Y T )
The term (1c1) is called the propensity to save.
Chapter 3: The Goods Market
In equilibrium:
I c 0 (1 c 1 )(Y T ) ( T G )
Rearranging terms, we get the same result as before:
1
Y
[c0 I G c1T ]
1 c1
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Key Terms
Consumption (C)
Investment (I)
Fixed investment
Nonresidential investment
Residential investment
Government spending (G)
Government transfers
Imports (IM)
Exports (X)
Net exports (X-IM)
Trade balance
Trade surplus
Trade deficit
Inventory investment
Identity
Disposable income (YD)
Consumption function
Behavioral equation
Linear relation
Parameter
Propensity to consume (c1)
Endogenous variables
Exogenous variables
Fiscal policy
Equilibrium
Equilibrium in the goods market
Equilibrium condition
Autonomous spending
Balanced budget
Multiplier
Geometric series
Econometrics
Dynamics
Forecast error
Consumer confidence index
Private saving (S)
Public saving (T-G)
Budget surplus
Budget deficit
Saving
IS relation
Propensity to save
Paradox of saving
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