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Chapter 3Chapter 3
The Goods MarketThe Goods Market
Chapter 3: The Goods Market Slide #2Blanchard: Macroeconomics
Chapter TopicsChapter Topics
The Composition of GDP
The Demand for Goods
The Determination of Equilibrium Output
Chapter 3: The Goods Market Slide #3Blanchard: Macroeconomics
IntroductionIntroduction
Chapter 3: The Goods Market Slide #4Blanchard: Macroeconomics
The Composition of GDPThe Composition of GDP
C -- Consumption Goods and services purchased by
consumers (68% of GDP)
I -- Fixed Investment Nonresidential and residential investment
(15% of GDP)
The Components of Aggregate Production (GDP)The Components of Aggregate Production (GDP)
Chapter 3: The Goods Market Slide #5Blanchard: Macroeconomics
The Composition of GDPThe Composition of GDP
G -- Government Spending Purchases by federal, state, and local
governments. Excludes transfer payments (18% of GDP)
The Components of Aggregate Production (GDP)The Components of Aggregate Production (GDP)
Chapter 3: The Goods Market Slide #6Blanchard: Macroeconomics
The Composition of GDPThe Composition of GDP
X - Q -- Net Exports Exports (X) (11% of GDP) - Imports (Q)
(13% of GDP) X > Q -- trade surplus X < Q trade deficit (2% of GDP)
The Components of Aggregate Production (GDP)The Components of Aggregate Production (GDP)
Chapter 3: The Goods Market Slide #7Blanchard: Macroeconomics
The Composition of GDPThe Composition of GDP
IS -- Inventory Investment Production - sales (1% of GDP)
The Components of Aggregate Production (GDP)The Components of Aggregate Production (GDP)
Chapter 3: The Goods Market Slide #8Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
Q- X G I C Z
Total DemandTotal Demand
Chapter 3: The Goods Market Slide #9Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
1. All firms produce the same good (The Goods Market)
2. The supply of goods is completely elastic at price P
3. The economy is closed. (X - Q = 0)
AssumptionsAssumptions
Chapter 3: The Goods Market Slide #10Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
G I C Z
Therefore,Therefore,
Chapter 3: The Goods Market Slide #11Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
The main determinant of C is disposable income (YD)
The consumption function
• C = C(YD)
(+)
Consumption (C)Consumption (C)
Chapter 3: The Goods Market Slide #12Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
C = C0 + C1YD
C1 = propensity to consume
• Change in C from a dollar change in income
0 < C1 < 1
Consumption (C)Consumption (C)
Chapter 3: The Goods Market Slide #13Blanchard: Macroeconomics
Consumption and Disposable IncomeConsumption and Disposable Income
Disposable Income,YD
Co
nsu
mp
tio
n,
c
ConsumptionfunctionC = c0 + C1YD
Slope = c1
Chapter 3: The Goods Market Slide #14Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
C = C0 + C1YD
)(consumers)by received trasfers - (Taxes
( income ( Income Disposable
T
- Y)YD )
T- YYD ( )
Consumption (C)Consumption (C)
Chapter 3: The Goods Market Slide #15Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
C = C0 + C1YD
T- YYD ( )
T)- (Y CC C 10
Consumption (C)Consumption (C)
Chapter 3: The Goods Market Slide #16Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
Consumption is a function of Y & T
Higher Y increases C, but less than 1 for 1
Higher T decreases C, but less than 1 for 1
ObservationsObservations
Chapter 3: The Goods Market Slide #17Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
Investment is an exogenous variable
Exogenous variables Variables that are assumed to be given and
are not explained within the model
Investment (I)Investment (I)
Chapter 3: The Goods Market Slide #18Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
or I does not respond to changes in production (Y)
_
I I
Investment (I)Investment (I)
Chapter 3: The Goods Market Slide #19Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
Endogenous Variables Variables that depend on other variables in
the model C is endogenous because it responds to
production (Y) C = C0 – C1 (Y – T)
Chapter 3: The Goods Market Slide #20Blanchard: Macroeconomics
The Demand for GoodsThe Demand for Goods
G & T are exogenous no reliable behavioral role for G & T G & T are determined outside the model
Government Spending (G)Government Spending (G)
Chapter 3: The Goods Market Slide #21Blanchard: Macroeconomics
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
0) Q- (X G I C Z
) T- YCC C 10 (
G I T)- YC C 10 ( Z
Demand for Goods (Z)Demand for Goods (Z)
Chapter 3: The Goods Market Slide #22Blanchard: Macroeconomics
Assume Firms do not hold inventories Y = supply of goods
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
EquilibriumEquilibrium
Chapter 3: The Goods Market Slide #23Blanchard: Macroeconomics
Supply of goods (Y) = Demand for goods (Z)
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
Equilibrium occurs when:Equilibrium occurs when:
Chapter 3: The Goods Market Slide #24Blanchard: Macroeconomics
Identity Equations
• Behavioral Equations
• Equilibrium Equations
•
T- YYD
) T-YCC C 10 (
Z Y
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
The Model and Equation TypesThe Model and Equation Types
Chapter 3: The Goods Market Slide #25Blanchard: Macroeconomics
Y = supply Z = Demand = Y = Z (equilibrium)
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
G I T)- YC C_
10 (
G I T)- YC C_
10 ( Y
Finding EquilibriumFinding Equilibrium
Chapter 3: The Goods Market Slide #26Blanchard: Macroeconomics
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
The AlgebraThe Algebra
Equilibrium Condition Y=Z
G I T)- YC C Z_
10 (
G I T)- YC C Y_
10 (
Chapter 3: The Goods Market Slide #27Blanchard: Macroeconomics
• Subtracting C1Y from both sides gives:
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
G I TC- YC C Y_
110
G I TC C YC- Y_
101
TC- G I C )C-Y(1 1
_
01
The AlgebraThe Algebra
Chapter 3: The Goods Market Slide #28Blanchard: Macroeconomics
• Dividing both sides by (1 - C1) gives
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
The AlgebraThe Algebra
TC- G I C )C-Y(1 1
_
01
1
1
_
0
1
1
C-1
TC- G I C
C-1
)C-Y(1
TC- G I C
C-1
1 Y 1
_
01
Chapter 3: The Goods Market Slide #29Blanchard: Macroeconomics
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
The Algebra: Y=ZThe Algebra: Y=Z
TC- G I C
C-1
1 Y 1
_
01
) of nt(independe
spending autonomous
Y
TC- G I C 1
_
0
Chapter 3: The Goods Market Slide #30Blanchard: Macroeconomics
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
TC- G I C
C-1
1 Y 1
_
01
multiplier the is and 1 C-1
1
1
The Algebra: Y=ZThe Algebra: Y=Z
Chapter 3: The Goods Market Slide #31Blanchard: Macroeconomics
Would a change in I, G, or T have the same impact on Y?
The Determination ofThe Determination ofEquilibrium OutputEquilibrium Output
Question for DiscussionQuestion for Discussion
Chapter 3: The Goods Market Slide #32Blanchard: Macroeconomics
Equilibrium in the Goods MarketEquilibrium in the Goods Market
Income,Y
Dem
and
(Z
), P
rod
uct
ion
(Y
)45o line
Production
Slope = 1
Y1
Y1
Chapter 3: The Goods Market Slide #33Blanchard: Macroeconomics
Equilibrium in the Goods MarketEquilibrium in the Goods Market
Income,Y
Dem
and
(Z
), P
rod
uct
ion
(Y
)45o line
Production
ZZ
Demand
Autonomousspending
Equilibrium point:Y = Z
Slope = 1
A
Chapter 3: The Goods Market Slide #34Blanchard: Macroeconomics
B
ZZ’
Equilibrium in the Goods MarketEquilibrium in the Goods Market
Income,Y
Dem
and
(Z
), P
rod
uct
ion
(Y
)45o line
Y
ZZ
AY
Y1
Y1
C
DA’
End of ChapterEnd of Chapter
The Goods MarketThe Goods Market