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MACROECONOMIC BACKGROUND 1 MACROECONOMIC BACKGROUND 1
M.PourhosseiniM.Pourhosseini
MACROECONOMIC BACKGROUNDMACROECONOMIC BACKGROUND
• IN THIS TUTORIAL IN THIS TUTORIAL WE REVIEW SOME WE REVIEW SOME BASIC BASIC MACROECONOMIC MACROECONOMIC AGGREGATES AGGREGATES
• The purpose is to The purpose is to provide the students provide the students whose first degree is whose first degree is not economics with not economics with some basic tools some basic tools
• AGGREGATE AGGREGATE DEMANDDEMAND
• INJECTIONSINJECTIONS• WITHDRWALSWITHDRWALS• CONSUMPTIONCONSUMPTION• TAXESTAXES• IMPORTS IMPORTS • EXPORTS EXPORTS
aggregate demand
• Defining aggregate demand and national income
• This background is based on the KEYNESIAN THEORYThis background is based on the KEYNESIAN THEORY
• The 45° line diagram: the significance of the 45° line
• Defining aggregate demand and national income
• This background is based on the KEYNESIAN THEORYThis background is based on the KEYNESIAN THEORY
• The 45° line diagram: the significance of the 45° line
The 45The 45 line
O
Cd, W, J
Y
Cd + W (=Y)
O
Cd, W, J
Y
Cd + W (=Y)
£100bn
£100bn
The 45The 45 line
BACKGROUND TO KEYNESIAN THEORYBACKGROUND TO KEYNESIAN THEORY
• Defining aggregate demand and national income
• The 45° line diagram: the significance of the 45° line
• Consumption
– the consumption function
• Defining aggregate demand and national income
• The 45° line diagram: the significance of the 45° line
• Consumption
– the consumption function
The consumption functionThe consumption functionC
onsu
mpt
ion
(£bn
)
Y
C
Y (£bn)
0
20
40
60
80
100
120
0 20 40 60 80 100 120 140
0
20
40
60
80
100
120
0 20 40 60 80 100 120 140
Con
sum
ptio
n (£
bn)
Y
C
Y (£bn)
50
50
The consumption functionThe consumption function
BACKGROUND TO KEYNESIAN THEORYBACKGROUND TO KEYNESIAN THEORY
• Defining aggregate demand and national income
• The 45° line diagram: the significance of the 45° line
• Consumption– the consumption function
– the mpc
• Defining aggregate demand and national income
• The 45° line diagram: the significance of the 45° line
• Consumption– the consumption function
– the mpc
0
20
40
60
80
100
120
0 20 40 60 80 100 120 140
Con
sum
ptio
n (£
bn)
Y
C
Y (£bn)
50
50
The consumption functionThe consumption function
0
20
40
60
80
100
120
0 20 40 60 80 100 120 140
Con
sum
ptio
n (£
bn)
Y
C
Y (£bn)
50
50
C = 8
Y = 10
mpc = C / Y = 8/10 = 0.8
The consumption functionThe consumption function
Different consumption functions (a)Different consumption functions (a)
0
20
40
60
80
100
120
0 20 40 60 80 100 120 140
Con
sum
ptio
n (£
bn)
Y
C1
Y (£bn)
0
20
40
60
80
100
120
0 20 40 60 80 100 120 140
Different consumption functions (b)Different consumption functions (b)C
onsu
mpt
ion
(£bn
)
Y
C2
Y (£bn)
Different consumption functions (c)Different consumption functions (c)
0
20
40
60
80
100
120
0 20 40 60 80 100 120 140
Con
sum
ptio
n (£
bn)
Y
C3
Y (£bn)
0
20
40
60
80
100
120
0 20 40 60 80 100 120 140
Different consumption functions (d)Different consumption functions (d)C
onsu
mpt
ion
(£bn
)
Y
C4
Y (£bn)
BACKGROUND TO KEYNESIAN THEORYBACKGROUND TO KEYNESIAN THEORY
• Defining aggregate demand and national income
• The 45° line diagram: the significance of the 45° line
• Consumption– the consumption function
– the mpc
– other determinants of consumption
• Defining aggregate demand and national income
• The 45° line diagram: the significance of the 45° line
• Consumption– the consumption function
– the mpc
– other determinants of consumption
BACKGROUND TO KEYNESIAN THEORYBACKGROUND TO KEYNESIAN THEORY
• Defining aggregate demand and national income
• The 45° line diagram: the significance of the 45° line
• Consumption– the consumption function
– the mpc
– other determinants of consumption
– short-run and long-run consumption functions
• Defining aggregate demand and national income
• The 45° line diagram: the significance of the 45° line
• Consumption– the consumption function
– the mpc
– other determinants of consumption
– short-run and long-run consumption functions
Long-run and short-run consumption functionsLong-run and short-run consumption functions
0
20
40
60
80
100
120
0 20 40 60 80 100 120 140
Con
sum
ptio
n (£
bn)
Y
Clong run
Y (£bn)
Cnow
0
20
40
60
80
100
120
0 20 40 60 80 100 120 140
Con
sum
ptio
n (£
bn)
Y
Clong run
Y (£bn)
Cnow
C5 years’ time
Long-run and short-run consumption functionsLong-run and short-run consumption functions
0
20
40
60
80
100
120
0 20 40 60 80 100 120 140
Con
sum
ptio
n (£
bn)
Y
Clong run
Y (£bn)
Cnow
C5 years’ time
C10 years’ time
Long-run and short-run consumption functionsLong-run and short-run consumption functions
BACKGROUND TO KEYNESIAN THEORYBACKGROUND TO KEYNESIAN THEORY
• Defining aggregate demand and national income
• The 45° line diagram: the significance of the 45° line
• Consumption– the consumption function
– the mpc
– other determinants of consumption
– short-run and long-run consumption functions
– the consumption of domestically produced goods
• Defining aggregate demand and national income
• The 45° line diagram: the significance of the 45° line
• Consumption– the consumption function
– the mpc
– other determinants of consumption
– short-run and long-run consumption functions
– the consumption of domestically produced goods
0
20
40
60
80
100
120
0 20 40 60 80 100 120 140
The consumption of domestic productThe consumption of domestic productC
onsu
mpt
ion
(£bn
)
Y
C
Y (£bn)
0
20
40
60
80
100
120
0 20 40 60 80 100 120 140
The consumption of domestic productThe consumption of domestic productC
onsu
mpt
ion
(£bn
)
Y
C
Y (£bn)
Cd
BACKGROUND TO KEYNESIAN THEORYBACKGROUND TO KEYNESIAN THEORY
• Withdrawals– net saving: the saving function
the mps
• Withdrawals– net saving: the saving function
the mps
The net saving function: (a) linearThe net saving function: (a) linear
O
Saving
Y
Cd + W (=Y)
The net saving function: (a) linearThe net saving function: (a) linear
O
Saving
Y
Cd + W (=Y)
S
The net saving function: (b) non-linearThe net saving function: (b) non-linear
O
Saving
Y
Cd + W (=Y)
S
BACKGROUND TO KEYNESIAN THEORYBACKGROUND TO KEYNESIAN THEORY
• Withdrawals– net saving: the saving function
the mpsdeterminants of saving
• Withdrawals– net saving: the saving function
the mpsdeterminants of saving
Household saving as % of personal disposable incomeHousehold saving as % of personal disposable income
Source: Datastream
BACKGROUND TO KEYNESIAN THEORYBACKGROUND TO KEYNESIAN THEORY
• Withdrawals– net saving: the saving function
the mpsdeterminants of saving
– net taxes: tax functionsthe mpt
• Withdrawals– net saving: the saving function
the mpsdeterminants of saving
– net taxes: tax functionsthe mpt
The aggregate net tax function: (a) lump-sum taxThe aggregate net tax function: (a) lump-sum tax
O
Taxes
Y
Cd + W (=Y)
The aggregate net tax function: (a) lump-sum taxThe aggregate net tax function: (a) lump-sum tax
O
Taxes
Y
Cd + W (=Y)
T
The aggregate net tax function: (b) proportional taxesThe aggregate net tax function: (b) proportional taxes
OY
Cd + W (=Y)
T
Taxes
The aggregate net tax function: (c) progressive taxesThe aggregate net tax function: (c) progressive taxes
OY
Cd + W (=Y)
T
Taxes
The aggregate net tax function: (d) regressive taxesThe aggregate net tax function: (d) regressive taxes
OY
Cd + W (=Y)
T
Taxes
BACKGROUND TO KEYNESIAN THEORYBACKGROUND TO KEYNESIAN THEORY
• Withdrawals– net saving: the saving function
the mpsdeterminants of saving
– net taxes: tax functionsthe mptexpenditure taxes & Cd
• Withdrawals– net saving: the saving function
the mpsdeterminants of saving
– net taxes: tax functionsthe mptexpenditure taxes & Cd
BACKGROUND TO KEYNESIAN THEORYBACKGROUND TO KEYNESIAN THEORY
• Withdrawals– net saving: the saving function
the mpsdeterminants of saving
– net taxes: tax functionsthe mptexpenditure taxes & Cd
– imports: import functions
• Withdrawals– net saving: the saving function
the mpsdeterminants of saving
– net taxes: tax functionsthe mptexpenditure taxes & Cd
– imports: import functions
BACKGROUND TO KEYNESIAN THEORYBACKGROUND TO KEYNESIAN THEORY
• Withdrawals– net saving: the saving function
the mpsdeterminants of saving
– net taxes: tax functionsthe mptexpenditure taxes & Cd
– imports: import functionsthe mpm
• Withdrawals– net saving: the saving function
the mpsdeterminants of saving
– net taxes: tax functionsthe mptexpenditure taxes & Cd
– imports: import functionsthe mpm
The import function: (a) imports with low income elasticity of demandThe import function: (a) imports with low income elasticity of demand
OY
Cd + W (=Y)
Exp
endi
ture
on
Impo
rts
The import function: (a) imports with low income elasticity of demandThe import function: (a) imports with low income elasticity of demand
OY
Cd + W (=Y)
M
Exp
endi
ture
on
Impo
rts
The import function: (a) imports with high income elasticity of demandThe import function: (a) imports with high income elasticity of demand
OY
Cd + W (=Y)
MExp
endi
ture
on
Impo
rts
BACKGROUND TO KEYNESIAN THEORYBACKGROUND TO KEYNESIAN THEORY
• Withdrawals– net saving: the saving function;
the mpsdeterminants of saving
– net taxes: tax functions;the mptexpenditure taxes & Cd
– imports: import functions;the mpmeffect of imports on Cd
• Withdrawals– net saving: the saving function;
the mpsdeterminants of saving
– net taxes: tax functions;the mptexpenditure taxes & Cd
– imports: import functions;the mpmeffect of imports on Cd
BACKGROUND TO KEYNESIAN THEORYBACKGROUND TO KEYNESIAN THEORY
• Withdrawals– net saving: the saving function;
the mpsdeterminants of saving
– net taxes: tax functions;the mptexpenditure taxes & Cd
– imports: import functions;the mpmeffect of imports on Cd
– the withdrawals function
• Withdrawals– net saving: the saving function;
the mpsdeterminants of saving
– net taxes: tax functions;the mptexpenditure taxes & Cd
– imports: import functions;the mpmeffect of imports on Cd
– the withdrawals function
BACKGROUND TO KEYNESIAN THEORYBACKGROUND TO KEYNESIAN THEORY
• Withdrawals– net saving: the saving function;
the mpsdeterminants of saving
– net taxes: tax functions;the mptexpenditure taxes & Cd
– imports: import functions;the mpmeffect of imports on Cd
– the withdrawals functionthe mpw
• Withdrawals– net saving: the saving function;
the mpsdeterminants of saving
– net taxes: tax functions;the mptexpenditure taxes & Cd
– imports: import functions;the mpmeffect of imports on Cd
– the withdrawals functionthe mpw
The The WW and and CCdd functions functions
OY
Cd + W (=Y)
Cd, W
The The WW and and CCdd functions functions
OY
Cd + W (=Y)
W
Cd, W
OY
Cd + W (=Y)
W
Cd, WThe The WW and and CCdd functions functions
Cd
OY
Cd + W (=Y)
W
Cd, W
Cd
100
100
70
30
The The WW and and CCdd functions functions
BACKGROUND TO KEYNESIAN THEORYBACKGROUND TO KEYNESIAN THEORY
• Injections
– investmentincreased consumer demand
expectations
cost and efficiency of capital
rate of interest
– government expenditure
– exports
– the injections function
• Injections
– investmentincreased consumer demand
expectations
cost and efficiency of capital
rate of interest
– government expenditure
– exports
– the injections function
THE DETERMINATION OF NATIONAL INCOMETHE DETERMINATION OF NATIONAL INCOME
• Equilibrium national income
– withdrawals equal injections
• Equilibrium national income
– withdrawals equal injections
Deriving equilibrium national incomeDeriving equilibrium national income
OY
W
Cd, W, J
J
OY
W
Cd, W, J
J
Y1
b
a
Deriving equilibrium national incomeDeriving equilibrium national income
OY
W
Cd, W, J
J
Y2
d
c
Deriving equilibrium national incomeDeriving equilibrium national income
OY
W
Cd, W, J
J
Ye
x
Deriving equilibrium national incomeDeriving equilibrium national income
THE DETERMINATION OF NATIONAL INCOMETHE DETERMINATION OF NATIONAL INCOME
• Equilibrium national income
– withdrawals equal injections
– income equals expenditure
• Equilibrium national income
– withdrawals equal injections
– income equals expenditure
OY
W
Cd, W, J
J
Deriving equilibrium national incomeDeriving equilibrium national income
OY
W
Cd, W, J
J
Cd
Deriving equilibrium national incomeDeriving equilibrium national income
OY
Y = Cd + W
W
Cd, W, J
J
Cd
Deriving equilibrium national incomeDeriving equilibrium national income
OY
W
Cd, W, J
J
Cd
Y = Cd + WE = Cd + J
Deriving equilibrium national incomeDeriving equilibrium national income
OY
W
Cd, W, J
J
Cd
Y = Cd + WE = Cd + J
Y1
f
e
Deriving equilibrium national incomeDeriving equilibrium national income
OY
W
Cd, W, J
J
Cd
Y = Cd + WE = Cd + J
Y2
h
g
Deriving equilibrium national incomeDeriving equilibrium national income
OY
W
Cd, W, J
J
Cd
Y = Cd + WE = Cd + J
Ye
x
z
Deriving equilibrium national incomeDeriving equilibrium national income
