Chapter 10 - Aggregate Expenditures:
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Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide End Show 10 - 1 10 C HAPTE R The Aggregate Expenditures Model Next Slide Copyright McGraw-Hill/Irwin, 2005 Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide End Show 10 - 2 Next Slide Aggregate Expenditures Model Simplifications... •A Private Closed Economy •Defer Government & Taxes •Defer Exports and Imports •Real GDP = DI •Excess Production Capacity •Unemployed Labor Exists •More Aggregate Expenditures Doesn’t Affect Price Level Copyright McGraw-Hill/Irwin, 2005 Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide End Show 10 - 3 Next Slide Investment Demand Curve Investment Schedule Investment (billions of dollars) Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector Expected rate of return, r, and real interest rate, i (percents) INVESTMENT DEMAND & SCHEDULE Ig 20 8 20 20 ID 20 Investment (billions of dollars) Copyright McGraw-Hill/Irwin, 2005 Real Domestic Product, GDP (billions of dollars) Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector EQUILIBRIUM GDP Real Domestic Output Aggregate Expenditures Schedule Equilibrium GDP Full-Employment GDP Applications of the Model Limitations of the Model Key Terms GDP = C + Ig Previous Slide End Show 10 - 4 Next Slide Disequilibrium Graphical Analysis… Copyright McGraw-Hill/Irwin, 2005 Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide End Show 10 - 5 Next Slide Private spending, C + I g (billions of dollars) EQUILIBRIUM GDP (C + I g = GDP) $530 C + Ig Equilibrium 510 C 490 470 Ig = $20 Billion 450 430 410 C =$450 Billion 390 370 45 o o 370 390 410 430 450 470 490 510 530 550 Real domestic product, GDP (billions of dollars) Copyright McGraw-Hill/Irwin, 2005 EQUILIBRIUM GDP Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide End Show 10 - 6 Next Slide Saving and Planned Investment are Equal •Leakage •Injection No Unplanned Changes in Inventories •Above Equilibrium •Below Equilibrium •Actual Investment Copyright McGraw-Hill/Irwin, 2005 Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide End Show 10 - 7 Next Slide Equilibrium GDP 510 at I leveEquilibrium GDP g0 (C + Ig ) at Ig1 level of investmentl of investment 1 (C + I ) Private spending (billions of dollars) Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector CHANGES IN EQUILIBRIUM GDP AND THE MULTIPLIER g 490 0 Increases in the level of C + Ig 470 450 430 o 45 o 430 450 470 490 510 Real domestic product, GDP (billions of dollars) Copyright McGraw-Hill/Irwin, 2005 Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide End Show 10 - 8 Next Slide Private spending (billions of dollars) Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector CHANGES IN EQUILIBRIUM GDP AND THE MULTIPLIER 510 Equilibrium GDP at Ig2 level of investment (C + Ig ) 0 (C + Ig ) 490 2 470 Decreases in the level of C + Ig 450 430 o 45 o 430 450 470 490 510 Real domestic product, GDP (billions of dollars) Copyright McGraw-Hill/Irwin, 2005 Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide End Show 10 - 9 Next Slide INTERNATIONAL TRADE AND AGGREGATE EXPENDITURES Net Exports Positive if exports > imports Negative if imports > exports Net Exports and Aggregate Expenditures C + Ig + ( X – M ) Xn = ( X – M ) C + I g + Xn Copyright McGraw-Hill/Irwin, 2005 Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide End Show 10 - 10 INTERNATIONAL TRADE AND AGGREGATE EXPENDITURES Net Export Schedule Net Exports and Equilibrium GDP •Positive Net Exports •Negative Net Exports Next Slide Graphically… Copyright McGraw-Hill/Irwin, 2005 Previous Slide End Show 10 - 11 Next Slide Private spending (billions of dollars) Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Net Exports, Xn (billions of dollars) Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector INTERNATIONAL TRADE AND AGGREGATE EXPENDITURES 510 Aggregate Expenditures with Positive Net Exports C + Ig + Xn1 C + Ig 490 470 450 430 45 o o 430 450 470 490 510 Real domestic product, GDP (billions of dollars) +5 0 430 -5 Copyright McGraw-Hill/Irwin, 2005 450 470 490 510 Real GDP Previous Slide End Show 10 - 12 Next Slide Private spending (billions of dollars) Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Net Exports, Xn (billions of dollars) Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector INTERNATIONAL TRADE AND AGGREGATE EXPENDITURES 510 Aggregate Expenditures with Negative Net Exports C + Ig C + Ig + Xn2 490 470 450 430 45 o o 430 450 470 490 510 Real domestic product, GDP (billions of dollars) +5 0 430 -5 Copyright McGraw-Hill/Irwin, 2005 450 470 490 510 Real GDP Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide End Show 10 - 13 Next Slide INTERNATIONAL ECONOMIC LINKAGES • Prosperity Abroad • Tariffs • Exchange Rates Copyright McGraw-Hill/Irwin, 2005 GLOBAL PERSPECTIVE NET EXPORTS OF GOODS, 2001 Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector Negative Net Exports Positive Net Exports Canada France Germany Italy Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Japan United Kingdom United States Previous Slide End Show 10 - 14 Next Slide -400 -140 -100 -60 -20 0 20 60 Billions of Dollars Copyright McGraw-Hill/Irwin, 2005 Source: World Trade Organization 100 ADDING THE PUBLIC SECTOR Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide End Show 10 - 15 Next Slide Simplifying Assumptions •Government Purchases do not Affect Consumption and Investment Spending •All Taxes are Personal •Tax Collections are Fixed Graphically… Copyright McGraw-Hill/Irwin, 2005 ADDING THE PUBLIC SECTOR Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide End Show 10 - 16 Next Slide Government Purchases and Equilibrium GDP Aggregate Expenditures (billions of dollars) Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector C + Ig + Xn + G Government Spending of $20 Billion o 45 C + Ig + Xn C o 470 550 Real domestic product, GDP (billions of dollars) Copyright McGraw-Hill/Irwin, 2005 ADDING THE PUBLIC SECTOR Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide End Show 10 - 17 Next Slide Lump-Sum Tax and Equilibrium GDP Aggregate Expenditures (billions of dollars) Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector $15 Billion Decrease in Consumption from a $20 Billion Increase in Taxes o 45 C + Ig + Xn + G Ca + Ig + Xn + G o 490 550 Real domestic product, GDP (billions of dollars) Copyright McGraw-Hill/Irwin, 2005 FULL-EMPLOYMENT GDP Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide End Show 10 - 18 Next Slide Recessionary Gap Aggregate Expenditures (billions of dollars) Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector AE0 AE1 530 510 Recessionary Gap = $5 Billion 490 Full Employment o 45 o 490 510 530 Real domestic product, GDP (billions of dollars) Copyright McGraw-Hill/Irwin, 2005 FULL-EMPLOYMENT GDP Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide End Show 10 - 19 Next Slide Inflationary Gap Aggregate Expenditures (billions of dollars) Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector 530 AE2 AE0 Inflationary Gap = $5 Billion 510 490 Full Employment o 45 o 490 510 530 Real domestic product, GDP (billions of dollars) Copyright McGraw-Hill/Irwin, 2005 FULL-EMPLOYMENT GDP Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide End Show 10 - 20 Next Slide Injections Leakages Unplanned Changes in Inventories Recessionary Gap Inflationary Gap Copyright McGraw-Hill/Irwin, 2005 APPLICATIONS OF THE MODEL Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide End Show 10 - 21 •U.S. Recession of 2001 •U.S. Inflation in the Late 1980s Next Slide Copyright McGraw-Hill/Irwin, 2005 LIMITATIONS OF THE MODEL Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide End Show 10 - 22 Next Slide •Does Not Show Price-Level Changes •Ignores Premature Demand-Pull Inflation •Limited Real GDP to the Full-Employment Level •Does not Deal with CostPush Inflation •Does not Allow for “Selfcorrection” Copyright McGraw-Hill/Irwin, 2005 planned investment investment schedule aggregate expenditures schedule equilibrium GDP leakage injection unplanned changes in inventories net exports lump-sum tax recessionary gap inflationary gap Copyright McGraw-Hill/Irwin, 2005 BACK END Aggregate Expenditures Model Investment Demand and Schedule Equilibrium GDP Changes in Equilibrium GDP and the Multiplier International Trade and Aggregate Expenditures International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide End Show 10 - 24 Coming Next: AGGREGATE DEMAND AND AGGREGATE SUPPLY Next Slide CHAPTER 11 Copyright McGraw-Hill/Irwin, 2005
