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