Transcript Y=E
Expenditure Chapter 12 Four Components of Expenditure • • • • Personal Consumption Expenditure Government Consumption Expenditure Investment Net Exports Consumption, Investment, and Net Exports are determined in the private sector. Categories of Spending BEA NIPA Table 2.3.5 Gross domestic product....... 2005 12455.8 Personal consumption expenditures. 8742.4 Durable goods................... Motor vehicles and parts...... Furniture and household equipment.................... Other......................... 1033.1 448.2 Nondurable goods................ Food.......................... Clothing and shoes............ Gasoline, fuel oil, and other energy goods................. Other......................... 2539.3 1201.4 341.8 Services........................ Housing....................... Household operation........... Electricity and gas......... Other household operation... Transportation................ Medical care.................. Recreation.................... Other......................... 5170.0 1304.1 483.0 199.8 283.2 320.4 1493.4 360.6 1208.4 377.2 207.7 302.1 694.0 Consumption in HK • Four consumption categories 1. Food 2. Non-Durables: Clothes, Toys 3. Durables: White Goods, Electronics 4. Services: Health, Rental Source: CEIC Database Consumption Shares in HK 140 120 100 80 60 40 20 0 1970 1975 1980 1985 1990 1995 2000 FOOD DURABLES NONDURABLES SERVICES HK Personal Consumption Expenditure Million HK$ Private Consumption Expenditure Food & Non-alcoholic Beverages Alcoholic Beverages Tobacco Clothing, Footwear & Other Personal Effects Rent, Rates, Water & Housing Maintenance Fuel & Light Furniture, Furnishings & Household Equipment Household Operation Personal Care Medical Care & Health Expenses Transport & Communications Recreation & Entertainment Education Other Services 2007 986,821 115,673 4,612 4,210 115,798 151,150 15,953 67,559 19,264 23,491 40,566 83,309 61,560 19,599 263,605 11.7% 0.5% 0.4% 11.7% 15.3% 1.6% 6.8% 2.0% 2.4% 4.1% 8.4% 6.2% 2.0% 26.7% HK Short-term: Year to year growth 0.4 0.3 0.2 0.1 Durables NonDurables GDP 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 1977 1975 1973 1971 1969 1967 0 -0.1 -0.2 -0.3 Theory of consumption best explains non-durables, services and food consumption. HK NIPA Table 038 Gross Domestic Investment (and Components) Table 5.2.5. Gross and Net Domestic Investment by Major Type [Billions of dollars] Bureau of Economic Analysis Downloaded on 10/23/2006 At 8:46:47 AM Last Revised August 02, 2006 Line Gross Depreciation Net % of GDI 1 Gross domestic investment 2454.5 1604.8 849.7 100.00% 4 Gross private domestic investment 2057.4 1352.6 704.8 83.82% 22 Change in private inventories 7 Fixed investment 2036.2 1352.6 683.6 82.96% 10 Nonresidential 1265.7 1045.6 220.1 51.57% 13 Structures 338.6 260.6 78 13.80% 16 Equipment and software 927.1 785 142.1 37.77% 19 Residential 770.4 307 463.4 31.39% 23 Gross government investment\1\ 397.1 252.2 144.8 16.18% 30 Structures 248.9 127.4 121.5 10.14% 37 Equipment and software 148.1 124.8 23.3 6.03% BEA NIPA Table 5.2.5 Investment HK, 2007 Million HK$ Gross Fixed Capital Formation (GFCF) Building and Construction Private Public Costs of Ownership Transfer Machinery, Equipment and Computer Software Private Public 2007 325,349 111,777 86,983 24,794 24,497 189,075 182,113 6,962 34.4% 26.7% 7.6% 7.5% 58.1% 56.0% 2.1% Volatility: Investment and GDP Annual Growth Rates Hong Kong 30.00% 25.00% 15.00% 10.00% 5.00% 0.00% 19 65 19 68 19 71 19 74 19 77 19 80 19 83 19 86 19 89 19 92 19 95 19 98 20 01 % Growth Rates 20.00% -5.00% -10.00% -15.00% -20.00% GDP I Government Consumption Expenditure: Hong Kong Milion HK$ Expenditure Compensation of Employees Purchases of Goods & Services Sales by Non Trading Govt Dept 2007 130,398 100,674 41,013 11,289 77.2% 31.5% 8.7% Consumption and Disposable Income • Many households live paycheck to paycheck and will spend money as it comes in. Thus, consumption is a function of disposable income which increases with income. Increase in Consumption } C m arg inal propensity to consume Increase in Income } mpc Y Factors Affecting the Level of Autonomous Consumption Spending • • • • Personal taxes Real interest rate Consumer confidence Existing stock of wealth – Strongly affected by stock and RE prices • Availability of consumer credit • Stock of consumer debt outstanding 13 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 4/9/2016 Investment and Cash Flow • Financial Accelerator Effect: Download When business cycle conditions improve, business cash flow also improves. Businesses, especially those without access to financial markets, rely on cash flow for financing. Increase in Consumption } I m arg inal propensity to invest Increase in Income } mpinv Y Determinants of Gross Private Domestic Investment 15 • Level of real income and output in the economy • Real interest rates • Business taxes • Expected Profits and Business Confidence • Capacity utilization rates • Residential Investment Spending • Inventory Investment Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 4/9/2016 Multiplier Effect in the Open Economy • Multiplier feedback is moderated by international trade. • Some of the extra expenditure generated by extra income/cash flow will be spent on imports and thus not generate extra demand for domestic goods. • Multiplier effect smaller in economies that spend a high fraction of their income on imported goods. Expenditure Function E mpex mpc mpinv mpim Autonomous Expenditure 1 E0 Y Expenditure is a Feedback Loop • Expenditure is determined by household and corporate income. • Income is determined by the value added of output in the economy. • Output will be determined by demand for expenditure. Y=E Equilibrium Expenditure Y=E E mpex Y D E E0 mpex Y D (1 mpex) Y D E0 YD E0 Y YD E0 1 mpex Disequilibrium Level Income and Output Adjustment 20 Relationship of E to Y Inventories E>Y Unexpected decrease in inventories Output increases E=Y Inventories are at expected level Output equilibrium E<Y Unexpected increase in inventories Output decreases Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Output Adjustment 4/9/2016 Multiplier Effect • Changes in autonomous expenditure will have multiple impacts on output. • The higher is the marginal propensity to consume or invest, the larger is that multiple. • The more open is the economy, the smaller is that multiple. Multiplier Effect (if mpinv,mpim=0) Production Consumption Income Savings Multiplier Effect 2 Production Consumption Income Savings Multiplier Effect 3 Production Consumption Income Savings Multiplier Effect: Open Economy Production Consumption Income Imports Savings Interest and Autonomous Expenditure • There is negative relationship between the real interest rate and consumption and expenditure. • Real interest rate, r, is: – the direct cost of financing corporate investment, housing, or consumer durables. – the return on saving and thus the opportunity cost of consumption. Interest Sensitive Autonomous Expenditure • Define IRE (r ) as the part of expenditure which is interest sensitiv and NIRE as the noninterest sensitive component. E0 (r ) IRE (r ) NIRE • Autonomous expenditure is a negatively related to the real interest rate. This means that equilibrium expenditure is negatively related to expenditure Consider r2 < r1 Y=E E Y D E E0 mpex Y D E0(r2) (1 mpex) Y D E0 YD E0(r1) YD(r 1) Y E0 1 mpex Learning Outcomes • Students should be able to name the main components of expenditure and their determinants. • Students should be able to calculate equilibrium expenditure as a multiple of autonomous expenditure. • Use the model of equilibrium expenditure to explain the effect of events on demand for goods.