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Composition of GDP
(The Percentages are for USA in 2010) (C) Consumption 70.5% (I) Investment 12% (G) Government Spending 20.4% (X - IM) Trade Balance/Net Exports 3.5% Inventory Investment? (Book is unclear on how it fits in) TERM 2
Consumption (C)
DEFINITION 2 Goods and services purchased by consumers. C = c0 + c YdConsumption = theoretical consumption at 0 income + (propensity to consume x Disposable Income)c0 is y interceptc1 is slopeYd is Disposable income (Income - Taxes or Y - T) TERM 3
Investment (I)
DEFINITION 3 The sum of residential and nonresidential investment. I = nonresidential + residential investmentI = S + ( T - G )I = -c0 + ( 1 - c1 ) ( Y - T ) + ( T - G ) S: private savingT: taxesG: government spending TERM 4
Government Spending (G)
DEFINITION 4 Purchases of goods and services by federal, state, and local governments.Does NOT include government transfers like medicare, interest on debt, or social security. TERM 5
Trade Balance or Net Exports
DEFINITION 5 The difference between exports (X) and imports (IM).If exports exceeds imports, country has a trade surplus If imports exceeds exports, country has a trade deficit Trade Balance = Exports - ImportsNE = X - IM
Inventory Investment
What is produced in a certain country is naturally also sold eventually, but some of the goods produced in a given year may be sold in a later year rather than in the year they were produced. Inventory Investment = Production - Sales TERM 7
Total Demand for Goods (Z)
(Equation)
DEFINITION 7 Z = C + I + G + X - IM Expanded: Z = c0 + c1(Y - T) + I + G Z: DemandC: ConsumptionI: InvestmentG: Government SpendingX: ExportsIM: Imports TERM 8
Disposable Income (Yd)
DEFINITION 8 Income that remains once consumers have received transfers from government and paid taxes.When disposable income goes up people buy more goods, when it goes down they buy less. Yd = Y - TY: IncomeT: TaxesThis is an identity equation TERM 9
Consumption Function (Equation)
DEFINITION 9 WIKIPEDIA: The consumption function is a single mathematical function used to express consumer spending. C = c0 + c1 Yd considered a "Behavioral Equation" C = C(Yd) defined as this in book but not really important to know. TERM 10
Propensity to Consume
(c1)
DEFINITION 10 Gives the effect an additional dollar of disposable income has on consumption.Is c1 in the consumption equation: C = c0 + c1 YdUsually positive and less than 1 b/c people are likely to consume some but not all of additional income received.
Autonomous Spending
The part of demand for goods that does NOT depend on output.Autonomous Spending = [ c0 + I + G - c1T ]If T = G (Balanced Budget), and the propensity to consume (c1) is less than 1, then (G - c1T) is positive and so is Autonomous Spending. Only by a very large budget surplus ( T > G) could autonomous spending be negative. TERM 17
Balanced Budget
DEFINITION 17 A country runs a balanced budget when Taxes equals Government Spending.T = G If T = G, and the propensity to consume (c1) is less than 1, then (G - c1T) is positive and so is Autonomous Spending. TERM 18
Multiplier
DEFINITION 18 Multiplies autonomous spending. Is greater than 1 Multiplier = 1 (1 - c1) Example: if c0 increases by 1billion, output increases by more than 1billion. If c1=0.6 then multiplier=1 / (1 - 0.6) = 2.5 therefore output increases by 2.5 x 1billion which = 2.5billion TERM 19
Demand & Production as Functions of
Income
DEFINITION 19 Demand as a function of income: Z = ( c0 + I + G - c1T) + c1YEQ output = Y = Z, b/c only at that point Production=Demand Y Intercept = Autonomous SpendingSlope = c1 = propensity to consumeZZ = relation between demand and incomeProduction line is 45 degrees b/c production and income are equal TERM 20
Changes in Demand
DEFINITION 20 An Increase in demand leads to an increase in production and a corresponding increase in income, increased income leads to further increase in demand, which leads to further increase in production ETC.
Econometrics
The set of statistical methods used in economics. TERM 22
Dynamics
DEFINITION 22 Formally describing adjustments (of something like output) over time. TERM 23
Private Saving (S)
DEFINITION 23 Savings by consumers.Is equal to their disposable income minus consumption: S = Yd - C therefore S is equal to Income minus taxes minus consumption: S = Y - T - C = Y - T - c0 - c1 ( Y - T ) TERM 24
Public Saving
DEFINITION 24 Public saving is equal to Taxes (T) minus government spending (G) Public Saving = T - G If T < G, budget deficitIf T > G, budget surplus TERM 25
IS relation
DEFINITION 25 Stands for "Investment equals Saving"Equilibrium in the goods market requires that investment (I) equals saving (sum of public and private saving)I = S + ( T - G)S: Private saving(T - G): public saving
