Change in Consumption Demand (Shifters of Aggregate Demand)
change in consumption demand
Shifters of Aggregate Demand
Determinants of investment Demand
Determinants of Government Demand
Determinants of Net Export Demand
GDP
How do we measure economic growth?
NDP NNI
Why do some countries have higher GDP?
Change in Consumption Demand (Shifters of Aggregate Demand)
change in consumption demand
disposable income
income tax
MPC(marginal propensity to consume)
MPS(marginal propensity to save)
Expectations and consumer confidence
Wealth
Interest rate
AD = GDP = C + I + G + X n
1. disposable income
可支配收入
income after tax
when disposable income increases ↗
consumers tend to spend more
consumption increases
when income tax increases
disposable income decreases ↘
consumption tremd to spend less
consumption decreases
AD = GDP = C + I + G + X n
3. MPC MPS
MPC -- marginal propensity to consume
the increases in consumption that results from a $1 increase in disposable income
MPS -- marginal propensity to save
the increases in saving that results from a $1 increase in disposable income
AD = GDP = C + I + G + X n
when MPC increase ↗
with the same level of disposable income
consume more
consumption increases
when MPS increase ↗
with the same level of disposable income
consume less
save more
consumption decreases
MPC + MPS = 1
AD = GDP = C + I + G + X n
4. Expextations/ Consumer confidence
when consumer confidence increases
consumers become more optimistic about the future
consumers tend to consume more
consumption increases
AD = GDP = C + I + G + X n
5. Wealth
Wealth = Real assets + Financial assets
6. Interest rate
when interest rate increases
it become more costly to finance spending
consumers tend to consume less
consumption decreases
AD = GDP = C + I + G + X n
Shifters of Aggregate Demand
Determinants of investment Demand
interest rate
expectations and business confidence
Business tax
Technology
1. interest rate
when interest rate increases
it becomes more costly for fitms to finance investment projects
→ investment decreases
2. expectations & business confidence
when business confidence increases
firms become more optimistic about the future
The expected rate of return increases
→ investment increases
3. Business tax
when business tax increases
production cost increases
investment decreases
4. technology
when there is technological improvement
Firms will purchase more new equipment
→ investment increases
Determinants of Government Demand
The level of government spending depends more on the decision of the government.
Therefore, is independent on the economics conditions.
Determinants of Net Export Demand
Foreign income
Economic condition in home and other
countries
Exchange rate
Consumer taste
Quality of domestic products
AD = GDP = C + I + G + X n
1. Foreign income
when the level of income increases in forign countries
The level of consumption increases Demand for our export increases
Net export increases
2. Economic condition in home and other countries
When home country is in a recession, the level of domestic income decreases, the demand for import decreases, Net export increases.
When foreign countries are in a recession, the level of foreign income decreases, the demand for our export decreases, Net export decreases.
3. Exchange rate
When exchange rate increases, export become more expensive, import become more cheaper. So export will decrease, import increase, Net
export decreases
When exchange rate decreases, export become more cheaper, import become more expensive. So export will increase, import decrease, Net
export increases.
4. Consumer taste
When consumers in foreign countries develop interests in our export, the demand for export will increase, net export increases.
5. Quality of domestic goods
The quality of demestic goods improves, export become more competitive internationally, the demand for export increas, net export increas.
GDP
ALL COUNTRIES HAVE THREE MACROECONOMIC GOALS
Promote Economic Growth (GDP)
Limit Unemployment
Keep Price Stable (Limit Inflation)
How do we measure economic growth?
Economists collect statistics on production, income, investment and savings
National income statistics
This is called national income accounting.
Gross Domestic Product (GDP)[1] is the market value of all final goods and services produced within a country in one year
Market value - GDP is measured in dollars
Final goods - GDP only counts NEW goods and services
Within a country - GDP measures production within the country's borders
One Year - GDP measures annual economic performance
Gross National Income (GNI)[2] is GDP plus net income from abroad.
Most countries' GDP and GNI are relatively similar
Multinational companies (MNCS)
NDP NNI
GDP and GNI inculde gross investment
Net Domestic Product (NDP) & Net National Income (NNI) only include net investment
Net investment gives an indication whether the country's ability to produce goods and services in the future will increase, stay or even
decrease.
What does GDP tell us?
Just like calculating your own income, GDP measures how well the U.S. is doing financially.
How do you use GDP?
1. Compare to previous years (Is there growth?)
2. Compare policy changes (Did a new policy work?)
3. Compare to other countries (Are we better off?)
How can you measure growth from year to year?
% change in GDP =
Y ear2−Y ear1
Y ear1
​
× 100%
Does GDP accurately measure standard of living?
Standard of living can be measured, in part, by how well the economy is doing... But it needs to be adjusted to reflect the size of the nation's population.
GDP Per Capita (per person)
GDP divided by the population. It identifies on average how many products each person makes.
GDP per capita is the best measure of a nation's standard of living
Why do some countries have higher GDP?
1. Economic System - Capitalism promotes innovation and provides incentives to improve productivity.
2. Rule of Law - Countries with solid institutions and political stability have historically had more economic growth
3. Capital Stock - Countries that have more machines and tools are more productive
Example 1: India has a relatively low GDP because they have a lot of labor but not very much capital. Example 2: Japan has few natu
4. Human Capital - Countries that have better education and training are more productive
5. Natural Resources - In general, countries that have access to more natural resources are more productive.
1. the most important measure of growth is GDP ↩︎
2. an increasing important measure is GNI ↩︎