Macro: Chapter 3: The Goods Market Flashcards
6 Items in GDP
- Private consumption (C)
- Gross private fixed investment (I)
- Government spending (G)
- Net exports (X & IM)
- Inventory Investment
- Residual Items
Consumption
Goods and services purchased by consumers.
Investment: 2 Components
- Non-residential investment
- Residential investment
Not included in government spending:
Government transfers (Social grants, interest on debt).
Inventory investment
Difference between goods produced and goods sold in a given year.
Demand for goods (Z) as an identity:
Z ≡ C + I + G + X - IM
Consumption function
C = c0 + c1 Yd
Marginal propensity to consume
Gives the effect an additional rand of disposable income has on consumption.
Disposable income, Yd
Income minus taxes paid (less government transfers received).
Yd ≡ Y - T
Autonomous spending
The part of the demand for goods that does not depend on output.
c0 + Ī + G - c1T
Balanced budget
Taxed equal government spending.
T = G
Multiplier
1/(1-c1)
Econometrics
Set of statistical methods used in economics
Private saving
Equals consumers disposable income minus their consumption:
S ≡ Yd - C
S ≡ Y - T - C
Public saving
Taxes (net of transfers) minus government spending
T - G
IS relation
Equilibrium in the goods market requires that investment = saving:
I ≡ S + (T - G)
(sum of public and private saving).
Derived from the demand for goods identity.
2 Ways of stating condition for equilibrium in the goods market
Production = Demand Investment = Saving
Propensity to save
1 - c1
(1 - propensity to consume)
Tells us how much of an additional unit of income people save.
