MACRO-ECONOMICS
LES 1: GOODS MARKET (H3)
INTRODUCTION
Macro-economics = study of how the economy moves over time on an aggregated level vb. Recession is a common
theme.
Micro-economics = interested in one market, focus on partial equilibrium, not taking other markets into account
Goods market → IS-curve (Investment – Saving)
COMPOSITION OF GDP
GDP kan onderverdeeld worden in 5 verschillende categorieën:
- Consumption of goods and services, consumption tends to fluctuate in similar cycles as incomes but it tends
to be more stable than income, is procyclical
- Investment: consumption of firms (investing in factories for example), investment is very volatile, is also
procyclical but it has bigger cycles. So investment is going to be responsible for fluctuactions despite the
smaller share.
- Government spending: is going to be quite different across countries. Its about the government purchasing
goods and services, taxes and transfers are not really comprised in this
- Net exports: difference between exports and imports, also differences a lot between countries. Vb. Closed
economy US, the US produces most of the goods it consumes VS. open economy Belgium, we trade a lot. A lot
of goods we produce, we don’t consume ourselves.
- Inventory investment: verwaarloosbaar aandeel
→ percentages of shares of the different categories are roughly similar across countries
We want to think about the short term, we want to think about who is consuming and we want to track what the
spending is in our economy.
- The total demand for goods is written as Z = C + I + G + X – IM
- This is a model, so there are some simplifications:
o Assume there is 1 good in the economy produced by a lot of firms, which can be used by consumers
for consumption, by firms for investment or by the government
o Assume that in the short run the firms are willing to supply whatever is being demanded.
o Assume that we study the closed economy, export and imports are zero now
CONSUMPTION (C)
Disposable income (Yd), is the income that remains once consumers have paid taxes and received transfers from the
government. This is a behavioral equation, which means it captures the behaviour of consumers. This function is
positive, which means that if you have more disposable income, then you are going to be more inclined to consume.
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,Consumption is determined by a component that is not dependent on the disposable income (= autonomous
consumption). This is what the agent will consume even if he/she has zero income C0 (vb. You still need to eat if you
have no income). But as my income increases, I will increase my consumption by C1 → C0 + C1 (Yd) . C1 is going to
be positive and typically smaller than one, because of the total income we are also going to save a part.
Differences changes along the curve and changes of the curve:
- Movements along the consumption function: happen when disposable income changes
- Changes of the curve: different shocks can happen, vb. Change in autonomous consumption, the function will
shift down.
Consumption is an endogenous variable because it depends on income.
INVESTMENT
Is a Exogenous variable = variable that is not explained within the model. Endogenous = variable that depend on other
variables within the model
Investment here is taken as given to simplify it
GOVERNMENT SPENDING
Is a exogenous variable. Govermnent spending G, together with taxes T, describes fiscal policy (= the choice of taxes
and spending by the government).
We are going to assume G and T are exogenous because:
- Governments do not behave with the same regularity as consumers or firms
- Macro economists must think about the implications of alternative spending and tax decisions of the
government
DETERMINATION OF EQUILIBRIUM OUTPUT
Z = C + I + G becomes
Equilibrium in the goods market requires that production (Y) is equal to the demand for goods (Z). → Y = Z. When you
produce, that is going to generate income so production and income can be used interchangeably.
To dertermine the equilibrium there are three tools:
- Algebra
- Graphs
- Words
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,ALGEBRA
When the government decides to increase spending by 1 euro, that means income in the economy is going to increase
more than 1 euro → multiplier.
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, GRAPHS
Demand is a function of income and a linear curve. Income comes from production and production is equal to income.
When 45-line and demand line cross, that means income is equal to demand or production is equal to demand.
There is a shock (vb. Increase government spending). When the government spends an additional unit, there is going
to be additional demand, if income stays the same. We move from point A to B. Additional demand is going to get
produced but given that the economy is producing more goods, the production is going to lead to profits. More
production means more income. We are not going to stay at Y level of income. So we end up at point C. But when
income moves up, then demand goes up too, of that new income we are going to spend a fraction C1. so there is a
second round of adjustment that will lead to point A’. The limit of these adjustments is equal to 1/(1-c1)
WORDS
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