The

Goods Market

Chapter 3
 3-1 The Composition of GDP
Table 3-1 The Composition of U.S. GDP, 2010

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 The demand for Goods

Z=C+I+G+(X-IM)
1.C is private consumption expenditure
(Household demand for g&s)
2.Investment: GFCF (apart from Inventory
Investment)= Ir+Inr
3.Gov. exp. On g&s not inclusive of transfers
4.X is exports which is demand by foreigners
5.IM demand for foreign g&s
6.Inv.=production-sales< 0 when …..
Indicates firms’ reaction to economic activity
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 3-2 The Demand for Goods

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 3-2 The Demand for Goods
Figure 3-1 Consumption and disposable income

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 3-2 The Demand for Goods

• Y is income or output
• T =taxes paid-transfers rec’d

• Investment is assumed fixed

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 3-3 The Determination of
Equilibrium Output

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3-3 The Determination of Equilibrium
Output – Closed Economy

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 3-3 The Determination of
Equilibrium Output
Figure 3-2 Equilibrium
in the goods market

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 3-3 The Determination of
Equilibrium Output
Figure 3-3 The effects
of an increase in
autonomous spending on
output

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 Focus: The Lehman Bankruptcy, Fears of Another
Great Depression, and Shifts in the Consumption
Function C declined when Y –T is still constant
Figure 1 Disposable income, consumption, and consumption of
durables in the United States, 2008:1 to 2009:3

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 Focus: The Lehman Bankruptcy, Fears of Another
Great Depression, and Shifts in the Consumption
Function
Figure 2 Google search volume for “Great Depression,” January
2008 to September 2009

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 3-4 Investment Equals Saving: An Alternative
Way of Thinking about Goods—Market Equilibrium

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 Thrift Paradox

$ S’
S

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 Notes-Limitations

• How long does it usually take for output to

adjust? Dynamic models vs static models
• Thrift Paradox, in this model saving more
means saving the same
• Size of multiplier (Investment and imports)
• Policy lags
• Institutional opposition to policy change

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