9 - 1 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts,

9 - 1Copyright McGraw-Hill/Irwin, 2002

Private Closed Economy

Consumption and Saving

Nonincome Determinants of Consumption and Saving

Terminology, Shifts, and Stability

Investment

Shifts in Investment Demand

Investment Demand and Schedule

Instability of Investment

Equilibrium GDP

Key Terms

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Building theAggregate Expenditures

Model

9C H A P T E R






Investment




Equilibrium GDP

Key Terms

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PRIVATE CLOSED ECONOMY

Simplifications...

• A Closed Economy• Defer Government & Taxes• Defer Exports and Imports• All Saving Is Personal• Net Income Abroad Is Zero•Aggregate Spending = Consumption and Investment






Investment




Equilibrium GDP

Key Terms

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Saving (S) = Disposable Income (DI) -Consumption (C)

Households consume most of their disposable income

Consumption & saving are directly related to income

Consumption ScheduleSaving ScheduleBreakeven Income

CONSUMPTION AND SAVING






Investment




Equilibrium GDP

Key Terms

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Co

nsu

mp

tio

nS

avin

g

o

o45

o

C

S

Consumptionschedule

Savingschedule

C

S

Disposable Income

Disposable Income

SAVING

SAVING

DISSAVING

DISSAVING

MPC = Slope of C

MPS = Slope of S

MPC + MPS = 1







Investment




Equilibrium GDP

Key Terms

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APC Consumption / Disposable Income

APS Saving / Disposable Income

MPS Change in SavingChange in Disposable Income

MPC Change in ConsumptionChange in Disposable Income






Investment




Equilibrium GDP

Key Terms

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.80 .85 .90 .95 1.0

.986

.976

.972

.940

.907

.873

.869

.842

Canada

United States

Netherlands

United Kingdom

Germany

Italy

Japan

France

GLOBAL PERSPECTIVEAverage Propensities to Consume,Selected Nations, 1999

Statistical Abstract of the United States, 2000






Investment




Equilibrium GDP

Key Terms

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NONINCOME DETERMINANTSOF CONSUMPTION AND SAVING

• Wealth• Wealth Effects

• Expectations• Taxation• Household Debt






Investment




Equilibrium GDP

Key Terms

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• Terminology• Schedule Shifts• Stability

Graphically…

TERMINOLOGY, SHIFTS, & STABILITY






Investment




Equilibrium GDP

Key Terms

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Co

nsu

mp

tio

nS

avin

g

o

o45

o

C0

S0

Disposable Income

Disposable Income

C1

S1


Increases inConsumptionMeans…

A DecreaseIn Saving






Investment




Equilibrium GDP

Key Terms

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Co

nsu

mp

tio

nS

avin

g

o

o45

o

C0

S0

Disposable Income

Disposable Income

C2

S2


Decreases inConsumptionMeans…

An IncreaseIn Saving






Investment




Equilibrium GDP

Key Terms

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Expected Rate of Return, r

Real Interest Rate, i

Inverse relationship betweenInvestment demand and theexpected rate of return

INVESTMENT

Graphically presented...






Investment




Equilibrium GDP

Key Terms

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Ex

pe

cte

d r

ate

of

retu

rn,

r,a

nd

inte

res

t ra

te, i

(pe

rce

nts

) 16

14

12

10

8

6

4

2

0

INVESTMENTDEMAND

CURVE

5 10 15 20 25 30 35 40

INVESTMENT

I D






Investment




Equilibrium GDP

Key Terms

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•Acquisition, Maintenance, and Operating Costs

•Business Taxes•Technological Change•Stock of Capital Goods on Hand

•Expectations

SHIFTS IN INVESTMENT DEMAND






Investment




Equilibrium GDP

Key Terms

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GLOBAL PERSPECTIVEGross Investment Expenditures as a Percentage of GDP, Selected Nations

40%

30%

20%

10%

0%Germany FranceUnited

StatesCanadaMexico United

KingdomSwedenJapan South

Korea

Source: World Bank






Investment




Equilibrium GDP

Key Terms

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INVESTMENT DEMAND & SCHEDULE

Exp

ecte

d r

ate

of

retu

rn,

r, a

nd

real

in

tere

st r

ate,

i (

per

cen

ts)

Inve

stm

ent

(bil

lio

ns

of

do

lla

rs)

Investment(billions of dollars)

20

8

20

Real Domestic Product, GDP(billions of dollars)

I D

Ig

InvestmentDemandCurve

InvestmentSchedule

20

20






Investment




Equilibrium GDP

Key Terms

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•Durability of Capital and

Variability of Expectations

•Irregularity of Innovation

•Volatility of Investment

INSTABILITY OF INVESTMENT






Investment




Equilibrium GDP

Key Terms

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EQUILIBRIUM GDP

GDP = C + Ig

Real Domestic OutputAggregate Expenditures ScheduleEquilibrium GDP

Saving and Planned Investment are Equal•Leakage•Injection

No Unplanned Changes in Inventories

Actual Investment






Investment




Equilibrium GDP

Key Terms

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Pri

vate

sp

end

ing

, C +

I g

(bill

ion

s o

f d

olla

rs)

o45

o

C

C + Ig

Ig = $20 Billion

Equilibrium

Real domestic product, GDP (billions of dollars)

370 390 410 430 450 470 490 510 530 550

(C + I g = GDP)

EQUILIBRIUM GDP

C =$450 Billion

$530

510

490

470

450

430

410

390

370






Investment




Equilibrium GDP

Key Terms

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Pri

vate

sp

end

ing

, C +

I g

(bill

ion

s o

f d

olla

rs)

o45

o

C

C + Ig

Ig = $20 Billion

Equilibrium


370 390 410 430 450 470 490 510 530 550

(C + I g = GDP)

EQUILIBRIUM GDP

C =$450 Billion

$530

510

490

470

450

430

410

390

370

Say’s Law






Investment




Equilibrium GDP

Key Terms

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Pri

vate

sp

end

ing

, C +

I g

(bill

ion

s o

f d

olla

rs)

o45

o

C

C + Ig

Ig = $20 Billion

Equilibrium


370 390 410 430 450 470 490 510 530 550

(C + I g = GDP)

EQUILIBRIUM GDP

C =$450 Billion

$530

510

490

470

450

430

410

390

370

ChapterConclusions

• consumption schedule• saving schedule• break-even income• average propensity to consu

me (APC)• average propensity to save (

APS)• marginal propensity to consu

me (MPC)• marginal propensity to save (

MPS)• wealth effect• expected rate of return• real interest rate

• investment demand curve• planned investment• investment schedule• aggregate expenditures

schedule• equilibrium GDP• 45 degree line• leakage• injection• unplanned changes in

inventories• actual investment

Copyright McGraw-Hill/Irwin, 2002ENDBACK






Investment




Equilibrium GDP

Key Terms

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Next...Aggregate Expenditures

The Multiplier, Net Exports,and Government

Chapter 10

Documents

9 - 1 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts,