南开大学中级宏观经济学课件Macro5

The equilibrium in the product market (continued)
IV. The Output Determination in a Simple Economy

The equilibrium in the product market (continued)


IV. The Output Determination in a Simple Economy

The equilibrium in the product market (continued)

To see why we can understand the equilibrium in terms of dynamics, we may reconstruct the model as follows Ct At cYt 1 Y C I t t t It I At A
AD = C+I+G+E-M
IV. The Output Determination in a Simple Economy

Aggregate Demand (continued)

This indicates that GDP is indeed the aggregate demand (AD) plus inventory change (V).
Macroeconomics
Lecture 5
Product Market Analysis: How Is Output Determined?
I. Introduction
The objective of this chapter is to study how output is determined in Keynesian framework. The analysis of output determination in this chapter is often named as multiplier analysis. The trading process: a trading day in Jevits Center (see textbook).

II. The Basic Hypothesis
Hypothesis 1: The agent does not have full confidence expectation (indicating ……). Hypothesis 2: There is no restriction in the capacity to supply output as demanded in the economy. Hypothesis 3: The price is given (or has been determined separately).

S=Y-C = Y - (A + cY) = -A + (1 - c)Y
III. Consumption Determination

Saving (continued)
III. Consumption Determination

Some Concepts

Average propensity to consume (APC)

The Model of Output Determination

Given by equation (1) - (3):
C = A + cY AD = C + I Y = AD
(1) (2) (3)
IV. The Output Determination in a Simple Economy

III. Consumption Determination

The autonomous demand and nonautonomous demand
The non-autonomous demand is the demand that is related to a recent sale from which the expenditure is supposed to be recovered. The autonomous demand is demand that is not related to a recent sale.

Aggregate Demand (continued)

Assume that the change in inventory is equal to 0:
V=0

Accordingly, we have
GDP = AD
IV. The Output Determination in a Simple Economy
IV. The Output Determination in a Simple Economy

The equilibrium in the product market (continued)

This model can be transformed into an one dimensional discrete time system:
APC = C/Y
Average propensity to save (APS)
APS = S/Y Marginal propensity to consume (MPC) MPC = C/Y Marginal propensity to save (MPS) MPS = S/Y


III. Consumption Determination

III. Consumption Determination

Consumption can be divided into two parts:
The income-related (non-autonomous) consumption Non-income-related consumption (often named autonomous consumption) Remark: Examples?
there is no government sector; there is no import and export.

IV. The Output Determination in a Simple Economy

Aggregate Demand

In macroeconomics, aggregate demand (AD) can be defined as the sum of consumption (C), gross investment (I), government expenditure (G) and net export (E-M).

The Aggregate Income

According to income approach, GDP is also reflected as income (Y) so that
Y = AD
(3)
IV. The Output Determination in a Simple Economy
GDP = AD + V

In a simple economy, the aggregate demand is equal to consumption plus investment:
AD = C + I
(2)
IV. The Output Determination in a Simple Economy
Investment-Saving (IS) Relation
• The equilibrium in the product market indicates that investment equals saving. • Therefore, the equation (4), which is the solution to the model, is sometime also called IS curve. • It represents the equilibrium condition in product market, given the autonomous demand A and I.

III. Consumption Determination

The Consumption Function
Accordingly, the consumption function can be written as
C = A + cY (1) where A can be regarded as autonomous consumption and cY as the incomerelated (non-autonomous) consumption. Note that also 1 > c > 0.

III. Consumption Determination

Nonlinear Consumption Function (continued)
IV. The Output Determination in a Simple Economy

The so-called simple economy is the economy in which
III. Consumption Determination

Consumption Function (continued):
III. Consumption Determination

Saving
Saving (S) is the income that is not used for consumption. Saving function:

Nonlinear Consumption Function
Perhaps, a more reasonable consumption function is a nonlinear function. In this case, MPC is declining. This is indeed suggested by Keynes in his General Theory. Remark: Why more reasonable?

The Model of Output Determination (continued)

Solution
(4) The graphic representation of solution (see the figure in the next page)
1 Y (A I) 1 c
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IV. The Output Determination in a Simple Economy

The Model of Output Determination (continued)
IV. The Output Determination in a Simple Economy

The equilibrium in the product market (continued)
Equation (4), which is the solution to the model, represents the equilibrium condition in the product market. This equilibrium is certainly not demandsupply equilibrium as in the usual microeconomic analysis. It is an equilibrium in the dynamic sense: the fixed point, the steady state.

Yt A I cYt 1 The steady state
*
1 Y (A I ) 1 c

The solution path (see the figure in the next page)
IV. The Output Determination in a Simple Economy