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The Goods
Goods Market
Market
CHAPTER 3
Prepared by:
Fernando Quijano and Yvonn Quijano
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Macroeconomics, 5/e Olivier Blanchard
3-1 The Composition of GDP
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3-1 The Composition of GDP
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3-1 The Composition of GDP
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3-1 The Composition of GDP
E x p o r ts = im p o r ts tr a d e b a la n c e
E x p o r ts > im p o r ts tr a d e s u r p lu s
E x p o r ts < im p o r ts tr a d e d e fic it
Chapter 3: The Goods Market
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3-2 The Demand for Goods
Z C I G X IM
Assume that all firms produce the same good, which can
Chapter 3: The Goods Market
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3-2 The Demand for Goods
Z C I G
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3-2 The Demand for Goods
Consumption (C)
Disposable income, (YD), is the income that remains once
consumers have paid taxes and received transfers from the
government.
C C (Y D )
( )
consumers.
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3-2 The Demand for Goods
Consumption (C)
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3-2 The Demand for Goods
Consumption (C)
Figure 3 - 1
Consumption and
Disposable Income
Consumption increases with
disposable income but less
than one for one.
C C (Y D )
YD Y T
Chapter 3: The Goods Market
C c 0 c1 (Y T )
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3-2 The Demand for Goods
Investment (I )
I I
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3-2 The Demand for Goods
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3-3 The Determination of Equilibrium Output
Assuming that exports and imports are both zero, the demand
for goods is the sum of consumption, investment, and
government spending:
Z C I G
Then: Z c0 c1 Y - T I G
Chapter 3: The Goods Market
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3-3 The Determination of Equilibrium Output
Y Z
Then: Y c0 c1 (Y T ) I G
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3-3 The Determination of Equilibrium Output
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3-3 The Determination of Equilibrium Output
Using Algebra
Rewrite the equilibrium equation:
Y c0 c1Y c1T I G
Move c1Y to the left side and reorganize the right side:
1 c Y c
1 0
I G c1T
Chapter 3: The Goods Market
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3-3 The Determination of Equilibrium Output
Using Algebra
1
one, 1 c1 is a number greater than one. For this reason, this
number is called the multiplier.
1
Y [c 0 I G c1T ]
1 c1
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3-3 The Determination of Equilibrium Output
Using a Graph
Z (c0 I G c1T ) c1Y
Figure 3 - 2
Equilibrium in the Goods
Market
Equilibrium output is determined
by the condition that production
be equal to demand.
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3-3 The Determination of Equilibrium Output
Using a Graph
Figure 3 - 3
The Effects of an
Increase in Autonomous
Spending on Output
An increase in autonomous
spending has a more than one-
for-one effect on equilibrium
output.
Chapter 3: The Goods Market
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3-3 The Determination of Equilibrium Output
Using a Graph
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3-3 The Determination of Equilibrium Output
Using a Graph
The second-round increase
in demand, shown by the
distance in CD, equals $1
billion times the propensity
to consume.
This second-round increase
in demand leads to an equal
increase in production, also
shown by the distance DC,
and thus an equal increase
in income, shown by the
distance DE.
Chapter 3: The Goods Market
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3-3 The Determination of Equilibrium Output
Using a Graph
1 + c1 + c12 + + c1n
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3-3 The Determination of Equilibrium Output
Using Words
To summarize:
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3-3 The Determination of Equilibrium Output
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Consumer Confidence and the 1990 to 1991 Recession
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Consumer Confidence and the 1990 to 1991 Recession
1991:2 27 47 8 77
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3-4 Investment Equals Saving: An Alternative
Way of Thinking about Goods-Market
Equilibrium
Saving is the sum of private plus public saving.
S YD C S Y T C
Public saving equals taxes minus government
spending.
I S (T G )
The equation above states that equilibrium in the
goods market requires that investment equals
savingthe sum of private plus public saving.
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Investment Equals Saving: An Alternative
Way of Thinking about Goods-Market Equilibrium
S Y T C
S Y T c0 c1 (Y T )
S c 0 (1 c 1 )(Y T )
The term (1c1) is called the propensity to save.
In equilibrium:
I c 0 (1 c 1 )(Y T ) ( T G )
Chapter 3: The Goods Market
1
Y [c0 I G c1T ]
1 c1
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The Paradox of Saving
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3-5 Is the Government Omnipotent?
A Warning
Changing government spending or taxes is not always easy.
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Key Terms
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