Chapter 1

Basic Keynesian ModelKeynesian Cross Diagram

Blanchard: Macroeconomics1Measuring the macroeconomyPg.2GNPpm = GDP factor incomes from abroad + factor incomes of foreignersNetNPpm = GNPpm - DepreciationNNP at factor costs = Net National Product Net indirect taxes + Subsidies (NNP=net national product at factor costs)NI (National Income) = NNPcfPersonal Dispousable Income (PDI = Family income = NI Direct taxes + Transfers - Profits + Undistributed profitsPersonal Disposable Income (PDI = Family income )= Consumption Spending + SavingsConsumer price index: the CPI measures the price increase of a merket basket fo goods representative of the purchases of a typical householdThe Unemployment rate: The unemployed are people who want to work and are actively looking for jobs but have not yet found one. The unemployment rate is equal to the number of unemployed people divided by the total labor force.Blanchard: Macroeconomics2Macroeconomic modelPg.3SectorsMarketsFunctions Endogenous variablesPolicies Households Firms Government Foreign SectorGoods and ServicesFinancial wealth: Money. Bonds.

Trabajo C, I, G, X,Q, T,S.

L, M/P.

Ls, Ld. Y (GDP) P (CPI) U (Unemployment) er (Exchange rates) r (Interest rates)

Demand side Fiscal. Monetary. Trade and Exchange rates policies. Supply side: Incomes. Structural.

Blanchard: Macroeconomics3Key conceptsPg.4GDP compositionThe demand of goods and servicesThe equilibriumBlanchard: Macroeconomics4Intended expenditure or aggregate demand componentsPg.5CCCCpriv+ I+ I+ I+ Cpub+ G+ G+ G+ Ipriv= Internal+ X+ Ipub+ X+ X= Final+ X- Q-Q- Q- QGDP mpGDP mpGDP mpGDP mpBlanchard: Macroeconomics5The circular flow of economic activityPg.6INCOMES WAGES ((FLOW OF INCOMES) MONETARY FLOWREAL FLOWHOUSEHOLDS(CONSUMPTION)FIRMS

(PRODUCTION)EXPENDITURE (FLOW OF EXPENDITURE)MARKETGOODS &SERVICESMERCADO DEFACTORES DEPRODUCCIONFACTORSGOODS AND SERVICESDemand varies, productionProduction varies, income variesIncome varies, demand variesBlanchard: Macroeconomics6National income identityPg.7Production is equal to income. Then:

This last equation states that savings should be sufficient for financing the investment spending, the budget deficit and the trade deficit. In other words, increases in budget or trade deficits unless accompanied by an equal increase in savings will lead to the crowding out of investment

Blanchard: Macroeconomics7Short-run macroeconomic modelsPg.8Keynesian model (Endogenous variable: Income)Fixed pricesPure exchange economy. No money

IS-LM Model (Endogenous variables: income-interest rate)Fixed pricesMonetary economyOpen economy without capital flows

IS-LM with capital mobility (Mundell-Fleming) (Endogenous variables: Income-interest rates)Fixed pricesMonetary economyOpen economy with capital flowsAggregate supply and demand model (Endogenous variables: Prices-Income). AS-AD diagramSticky pricesMonetary economyDynamic AS-AD model (endogenous variables: inflation rates and income)Blanchard: Macroeconomics8Keynesian model: assumptionsPg.9Government sector:

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