FILE: 252N05.HTML
FALL 2005
CLASS NOTES FOR ECONOMICS 252/WEEK 5/SEP20-22
DR. WILLIAM SHINGLETON
RETURN/REVIEW EXAMS
FINISH NOTES FROM LAST
WEEK
USE NOTATION
AS/AD FROM TEXT
REVIEW AD/AS/ CH 8
ECONOMIC PROBLEMS
ALL
ECONOMISTS AGREE SHORT-RUN FAILURE IS POSSIBLE
GOODS
MARKETS
CAN
PRICES BALANCE INVENTORIES?
REQUIRES PRICE FLEXIBILITY
HOW FLEXIBLE IS ENOUGH?
LABOR
MARKETS
CAPITAL
MARKETS
WHERE’S
THE BEEF?
KEYNES:
IN
THE LONG RUN WE ARE ALL DEAD
A
MARKET DRIVEN AD MIGHT NOT SHIFT WHEN
NECESSARY
TOTAL
SPENDING MIGHT BE UNSTABLE
AD/AS PUTS MOST OF THE PIECES
TOGETHER
COMPONENTS OF AD
SALES
= C + I + G + (X-M)
CHANGING SALES (AD) FROM ONE OF THESE
ELEMENTS
CONSUMPTION FUNCTION
CONSUMER
SPENDING/CONSUMPTION FUNCTION
SALES
TO CONSUMERS (70 PCT OF TOTAL)
INCOME
(DPI)
DPI
= GDP – TAXES
DISSAVING,
WHEN CONSUMER SPENDING IS MORE THAN DPI
OECD REPORTS US SAVING AT MINUS 1.3 PCT
MARGINAL
PROPENSITY TO CONSUME (MPC)
MPC = dC/dDPI
C
= CONSTANT + MPC * DPI
STATISTICAL
ESTIMATION
SHIFTS
IN THE CONSUMPTION FUNCTION
ANYTHING
OTHER THAN DPI
OTHER DRIVERS FOR CONSUMER SALES (C)
EXPECTATIONS
SURVEY
CONSUMER CONFIDENCE
EFFECT
ON SAVING
PRESIDENT AS CHEERLEADER
WEALTH
EFFECT
ABOUT
3 PCT OF STOCK MARKET CHANGES
CREDIT
CONDITIONS
INTEREST
RATES
SAVING/CONSUMPTION
AND INTEREST RATES
WHEN IS CREDIT MOST
AVAILABLE?
TAXES
TAX
RATES
PRICES/EXPECTED
INFLATION
DEMOGRAPHICS
DRIVERS FOR INVESTMENT SPENDING
INVESTMENT
SPENDING IS UNSTABLE
ANIMAL
SPIRITS
KEYNES..."A
RECESSION IS AN ANTICIPATED AND ONGOING
COLLAPSE OF PRIVATE INVESTMENT
EXPENDITURE"
[DARITY, SEJ JAN83:717‑733]
EXPECTATIONS
SURVEY
CONSUMER CONFIDENCE
SURVEY
BUSINESS CONFIDENCE
EFFECT
ON INVESTMENT
PRESIDENT AS CHEERLEADER
ACCELERATOR
HYPOTHESIS
DESIRED
OPERATING RATE IS LESS THAN 100%
CAPACITY,
INVESTMENT, AND STABILITY
CAPACITY
IS NOT WELL MEASURED
AS
GDP =>75% CAPACITY, INFLATION ARISES
ACTUAL
INVESTMENT PATTERNS MAY LEAD
RATHER THAN FOLLOW THE BUSINESS CYCLE
CREDIT
CONDITIONS
INTEREST
RATES
INVESTMENT
AND INTEREST RATES
WHEN IS CREDIT MOST AVAILABLE?
TECHNOLOGY
NEW
MARKETS
BUSINESS
TAXES
DRIVERS FOR GOVERNMENT SPENDING
INCOME AND TAX
REVENUE
STATE AND LOCAL
BALANCED BUDGETS
FEDERAL
STABLE OR
UNSTABLE?
LOGICAL?
DRIVERS FOR NET EXPORTS
FOREIGN
INCOMES
FOREIGN
PRICES
OPENNESS
OF FOREIGN MARKETS
EXCHANGE
RATES
AMERICAN
INCOMES
AMERICAN
PRICES
OPENNESS
OF AMERICAN MARKETS
AD/AS MACRO EQUILIBRIUM
SALES = C + I + G + X - M
AT WHAT GDP DOES
PRODUCTION = SALES?
AT
EQUILIBRIUM GDP = SALES = C + I + G + X - M
ADJUSTMENT CYCLE
dSALES => dGDP
=> dDPI => dSALES
SAMPLE PROBLEM
1. EXPLAIN EQUILIBRIUM
2. IDENTIFY THE STRUCTURAL EQUATIONS
3. FIND THE EQUILIBRIUM GDP
4. CHECK YOUR WORK
WHEN
IT IS RIGHT
WHEN
IT IS WRONG
STRUCTURAL EQUATIONS: EXAMPLES/ WORKSHEET 1
CONSUMPTION C= 1400+ .6*DPI
INVESTMENT I =
600
GOVERNMENT G =
400
TRADE
BALANCE X = -600
TAXES T = 0
GDP
= 4500
REVIEW PROBLEM/ANSWER
EQUILIBRIUM
PRODUCTION
(GDP) = SALES = C + I + G + X
DISPOSABLE
INCOME 2500
CONSUMER
SPENDING 1700
SAVING 800