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Expectations, Consumption, and Investment: Prepared By: Fernando Quijano and Yvonn Quijano
Expectations, Consumption, and Investment: Prepared By: Fernando Quijano and Yvonn Quijano
Consumption,
and Investment
CHAPTER 16
CHAPTER16
Prepared by:
Fernando Quijano and Yvonn Quijano
Panel data sets are data sets that show the value of one or
more variables for many individuals or many firms over
time.
© 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard 2 of 26
The Very Foresighted Consumer
Chapter 16: Expectations, Consumption,
Ct C(total wealtht )
In words:
Consumption is an increasing function of total
wealth, and also an increasing function after-tax
labor income. Total wealth is the sum of
nonhuman wealth – financial wealth plus housing
wealth – and human wealth – the present value
and Investment
buying it.
Depreciation:
The rate of depreciation, , measures how much
usefulness the machine loses from one year to
the next.
Reasonable values for are between 4 and 15%
for machines, and between 2 and 4% for
and Investment
1
e t 1
1 rt
and Investment
In year t+2, 1
(1 ) e
t2
(1 rt )(1 r t 1 )
e
In year t,
1 1
V ( t )
e
t 1
e
(1 ) e
t2
1 rt (1 rt )(1 r t 1 )
e
Figure 16 - 1
Computing the Present
Value of Expected
Profits
and Investment
I t I (V ( e t ))
( )
In words: Investment depends positively on the
expected present value of future profits (per unit
of capital).
and r e
t 1 r e
t 2 rt
and Investment
Figure 1
Tobin’s q.
Versus the Ratio
of Investment to
Capital: Annual
Rates of
Change, 1960-
1999
and Investment
t
Putting V ( t ) r and I t I (V ( e t ))
e
t
together give us an equation for investment:
t
It I
rt
and Investment
Figure 16 - 2
Changes in
Investment and
Changes in Profit in
the United States
since 1960
together.
together.
Figure 16 - 3
Changes in Profit
per Unit of Capital
Versus Changes in
the Ratio of Output
to Capital in the
United States since
1960
output to capital
move largely
together.
Yt
t
Kt
© 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard 21 of 26
The Volatility of
16-3
Consumption and Investment
Chapter 16: Expectations, Consumption,
Figure 16 - 4
Rates of Change of
Consumption and
Investment since
1960
Relative movements
in investment are
much larger than
and Investment
relative movements in
consumption.
level of investment is
much smaller than the
level of consumption,
changes in investment
from one year to the
next end up being of the
same overall magnitude
as changes in
consumption.