Intermediate_Macroeconomics_Lecture2.ppt

J. Ding, Nankai Univ. Macroeconomics, O. Blanchard Lecture 2 Goods Market The Three Market Arena Households, firms, the government, and the rest of the world all interact in the goods-and-services, labor, and money markets. The Demand for Goods The total demand for goods is: AE = C + I + G + （X – M） The Composition of GDP The Composition of GDP Consumption ( C ): the goods services purchased by consumers. It is divided into 3 subcategories: Nondurable goods: such as food cloth Durable goods: such as cars TVs Service: such as haircuts doctor visits Composition of GDP Investment ( I ): goods bought for future use. It is divided into 3 subcategories: Nonresidential investment: also called business fixed investment, the purchase of new plant and equipment by firms. Residential investment: the purchase of new houses or apartments by households and landlords Inventory investment: the increase in firms’ inventories of goods, that is, the difference between production and sales If inventories are falling, inventory investment is negative The Composition of GDP Government Spending ( G ): the goods and services bought by federal, state, and local government. It does not include transfer payments to individuals, such as Social Security and welfare The Composition of GDP Net exports (X-M): the difference between exports (X) and imports (M), also called the trade balance: Exports = imports ? trade balance Exports imports ? trade surplus Exports imports ? trade deficit Keynesian Cross Keynesian Cross is a closed-economy model in which income is determined by demand. (due to Keynes) Elements of Keynesian Cross: Consumption function C(YD) Government policy variables G, T Investment variable I Explaining Consumer Behavior In The General Theory, Keynes conjectured that: Marginal Propensity to Consume (MPC) is between 0 1, Average Propensity to Consume (APC) falls as income rises, Income is the primary determinant of C Question: Is there any problem with Keynes’ 3 conject