ECON 102 – Introduction to Economics II
Spring 2006
Dr. Ebru Güven Solakoğlu
Fatih University
Week 2
The Expenditure Component of GDP: ................................................................................... 1
Gross National Product (GNP) ............................................................................................... 2
National Income Accounting: A Summary (pg 282, Begg) ................................................... 2
Consumption and Saving Behavior: ....................................................................................... 3
Consumption Function: (C=A+cY) .................................................................................... 3
Marginal Propensity to consume ................................................................................................ 3
Saving Function: ................................................................................................................ 3
Marginal Propensity to save ....................................................................................................... 4
Determinants of Consumption ........................................................................................... 4
Investment: ......................................................................................................................... 4
Determinants of (Gross Private Domestic) Investment: ............................................................. 4
Investment Demand Curve: ........................................................................................................ 5
The Expenditure Component of GDP:
What do these final products consist of?
How are these aggregates actually measured?
Aggregate Expenditure = C+I+G+NE ≡ GDP
When each component of GDP is valued at base year prices, aggregate expenditure
measures real GDP.
Consumption: personal consumption expenditures…household and individual
purchases of both durable and nondurable goods and services.
C ≈ 2/3 or more of GDP
Investment: gross private domestic investment includes expenditure by business firms
on new machinery equipment; the value of new residential and non-residential
construction; change in business inventories during the year.
- increase in inventories; goods produced, but not sold during the year.
- Decrease in inventories; goods sold, but not produced during the year.
These inventory accumulations must be included in GDP to accurately measure current
production.
Net Private domestic investment = gross domestic investment – depreciation
Depreciation: is an estimate of the value of capital goods that wear out during the year.
Government Purchases of Goods and Services:
These are expenditures on final products of business firms and all input costs incurred by all
levels of government in the US.
≈ 20 % of GDP
- purchases (papers,planes,etc) included
- entire payroll of all governments in US
- government themselves produce valuable goods and services such as national
defense, police, fire dept.
They are not sold in the market, but they are indirectly included in GDP because the costs of
making these services are included
Net Exports:
Net exports are any excess of expenditure on exports over imports, i.e. exports-imports
Exports: expenditure on US final goods by foreigners
Imports: Expenditure by Americans on final products produced abroad.
Gross National Product (GNP)
GNP is the market value of final output produced annually by all labor and property supplied
by a nation’s households, no matter where those resources are employed.
GNP = GDP + A + B
A: income earned by US households from work or investment abroad
B: income earned by foreigners from work or investments in the US
GNP > GDP if A > B
GNP < GDP if A < B
National Income Accounting: A Summary (pg 347, Begg)
Net property
income from
abroad (A-B)
Net property
income from
abroad (A-B)
depreciation
G
GNP
I
NE
C
Indirect
taxes
GDP
NNP
(net
national
product) at
market
prices
NI
(national
income)
= NNP
at basic
prices
Rental
income
Profits
Income
from self
employment
Wages and
salaries
=Factor earnings
Consumption and Saving Behavior:
Total output is demand determined.
Assuming no government, closed economy, and using aggregate demand (AD) assuming
consumption is demanded by households, and investment is demanded by firms, we can
define AD as Y=C+I.
Consumption: expenditures by households on final goods and services.
- durable goods (motor vehicles, furniture, other household equipment, etc)
- nondurable goods (food, clothing and shoes, energy goods, etc)
- services (housing, transportation, medical care, recreation)
Saving: part of personal disposable income that is not consumed.
Consumption Function: (C=A+cY)
shows the relationship between the level of consumption expenditures and the level of
disposable income. (Keynes…a stable empirical relationship between consumption and
income)
Consumption
expenditures
Breakeven point (the
hh is neither
borrower or a saver)
saving
consumption
A
45
disposable
income
Marginal Propensity to consume
= the extra amount that people consume when they receive an extra dollar of disposable
income (slope of the consumption function)
Ex: ΔI = 1000, ΔC = 850  MPC=0.85
Saving Function:
shows the relationship between the level of savings and the level of disposable income.
(Y=C+S=A+cY+S
 S= -A+(1-c)Y
Savings ($)
S= -A+(1-c)Y
saving
disposable
income
-A
Marginal Propensity to save
= the extra amount that people save when they receive an extra dollar of disposable income
(slope of the saving function)
Ex: ΔI = 1000, ΔC = 850  MPS=0.15
MPC and MPS are mirror images of each other  MPS ≡ 1-MPC
Determinants of Consumption
1.
2.
3.
4.
current disposable income
permanent income (versus temporary income)
life cycle hypothesis
wealth
Investment:
- leads changes in aggregate demand  business cycle (short-run)
- capital accumulation  economic growth (long-run)
Determinants of (Gross Private Domestic) Investment:
1. Revenues
2. Costs (interest rates, opportunity costs)
3. expectations (economic, political risks)
Investment Demand Curve:
R (%)
ID
I ($)
What does shift investment Demand Curve (ID)?
1. GDP
2. government taxes
3. expectations