Transcript output - E-SGH

Macroeconomics I
Lecture 3
1
The determination of
national income
Output and demand
2
Equilibrium model of J. M. Keynes (1936)
Simple model ( no government, the closed
economy):
AD = C + I
1. Sticky wages and prices of goods
2. factors of production not fully employed
3. Short run approach: output depends on demand
only
3
Demand for consumption goods
Determined by the personal disposal income Yd
Consumption function: C= MPC . Yd + Ca (KSK=MPC)
4
M. Friedman and F. Modigliani consumption function
• Permanent income hypothesis of
M. Friedman: consumption determined not by
current income but by long term income
expectations. Short term change in income have
little effects on consumer spending behavior
• Life cycle hypothesis of F. Modigliani: close to
PIH, consumers make consumption plans for the
whole life. They dissave early and late in the life
and save during their peak earnings years –
consumption smoothening. It explains why
students live at much better level than their
incomes suggest.
•
5
Saving function
S= MPS x Yd – Ca,
KSO= MPS
6
• Marginal propensity to consume: fraction of a dollar
by which consumption increases when income rises by
a dollar
• MPC = 0.75 means that 75 cents of every extra dollar
in income is consumed
• The rest, remaining 25 cents is saved
• MPS (marginal propensity to save) = 0.25
• MPS + MPC = 1
7
Investment demand
investment plans do not depend on the level of
income (autonomous character of I )
8
Equilibrium output
Demand=
AD aggregate demand
Y=C+I
at point E
aggregate demand equals to
output
9
adjustment to equilibrium
Y, output
I
C=
8+0.7Y
AD=
C+I
Y-AD
Inventories
are
output
30
22
29
51
-21
↓
↑
80
22
64
86
-6
↓
↑
100
22
78
100
0
No
inventories
(E)
constant
120
22
92
114
+6
↑
↓
10
actual and full employment output
AD = Y (output) does not guarantee output at full employment level.
At Ye unemloyment is possible, distance Yb- Ye = output gap, Yb =
full employment output
11
Income determination
C = MPC x Y,
Y = C+I=MPC x Y + I
Y(1-MPC)=I
Y=I/1-MPC
MPC + MPS =1
Y=I/1-MPC = I/MPS or if MPC=c, MPS=s
Y=I/1-c=I/s
12
What is the equilibrium level of output?
•
•
•
•
•
•
•
C = 8 + 0.7Y
I = 13
C + I = 21 + 0.7 Y
Y = 21 + 0.7 Y
21 = Y (1-0.7)
Y = 21 : 0.3
Y = 70
13
The multiplier (M)
• M = ratio of the change in equilibrium output to the change
in autonomous investment
• M > 1, because any given change in investment demand
sets off further changes in consumption demand
• We should expect that that M related to the MPC
• M= 1/1- MPC
• M=1/MPS
• If MPC=0.7, M=1/1-0.7 or
• M=1/0.3 = 3.33
• The source of multiplier: Increase of the consumption that
takes place when autonomous investment goes up
14
adjustment to a shift in investment demand
steps
Y
I
C= 8+0.7Y
Ad=
C+I
Y-AD
inventorie
s
output
step 1
100
22
78
100
0
constant
Constant
step 2
100
13
78
91
9
↑
↓
step 3
91
13
71.7
84.7
6.3
↑
↓
step 4
84.7
13
67.3
80.3
4.4
↑
↓
New
equilibrium
70
constant
constant
Change in
investment
equals 9
13
57
70
0
Change in
output
equals 30
Multiplier
equals
30/9
15
Saving equals investment
•
•
•
•
•
I=Y–C
S=Y–C
I=S
In the economy firms are investing and households do the saving
Planned I=planned S only at the equilibrium level of output
(unplanned inventory changes = 0)
• Out of the equilibrium level of output: actual saving = actual
investment (change in inventories counts as investment)
• Actual means: planned + unplanned
16
The paradox of thrift
• Virtues of saving and spending:
• 1) the increase of consumption is good for a society,
spending provides jobs
• 2) saving is a good thing, it enables to provide more
consumption in the future
• Paradox of thrift (Keynesian model):
• If AD = Y, but there is no full employment level, the
private virtue of saving is not a public virtue (the collective
thrift may be bad for the economy)
• If AD = Y, but the economy operates at a full employment,
the desire to save will increase actual saving and encourage
investment, so AD and Y need not decline
• What is true of the parts must not be true of the whole
17
The government and
aggregate demand 1
• The government’s spending and tax decisions
constitute fiscal policy
• A budget – a description of the spending and
financing plans of an individual, business or
government
• Budget deficit – excess of government expenditure
over its receipts
• Deficit paid by borrowing from the public through
selling bonds
• The national debt – amount of government debt in the
hands of the public
18
The government and aggregate demand 2
•
Government’s spending financed by: indirect taxes minus
transfers payed to business, direct taxes minus transfers
payed to households (NT), income from state property D
•
Government purchases G - a part of the demand for goods
and services
•
AD=C+I+G
•
If we assume that net indirect taxes = 0 and D = 0, the
budget income equals net income from direct taxes NT = t
x Y, Yd=Y-NT, Yd=Y-tY, Yd=Y(1-t)
•
C =MPC x Yd, C=MPC x Y(1-t)
•
MPC’ = MPC(1-t),
•
Multiplier = 1/ 1-MPC’ = 1/1-MPC(1-t)
•
Taxes drive a gap between GNP and personal disposable
income
19
The impact of changes in G and NT
• Change in G (NT=0) changes the equilibrium output
level. The increase of G – the same effect as an
increase in investment demand ( the role of
multiplier)
• The aggregate demand curve shifts upward by the
amount=G
• The change of NT – change of C because of the
change in MPC’
• The slope of C curve is changing
• The increase in G and decrease in NT – the increase of
the equilibrium output level.
20
The budget deficit
•
The government budget describes: a) what goods and services the government will buy,
b) what transfers it will make and c) how it will finance its spending with tax revenues
•
D=0, indirect taxes =0, so net direct taxes NT taken into consideration only
•
S+NT= leakages from circular flow: net taxes and saving – incomes not spent on
consumption
•
I+G=injections: income of firms and government not financed by huseholds
•
Budget deficit = G - NT
•
S+NT =G+I, it means that S ≠ I if there is budget deficit or surplus
•
S-I=G-NT,
•
If G > NT (budget deficit) , some saving used to finance the deficit (S>I)
•
2 cases:
•
1) The increase in G. It makes the budget deficit higher: the equilibrium output level
goes up, personal disposable income goes up, that increases saving and S-I, because I
does not depend on income. At the same time tax revenues go up because income is
going up. But tax revenue do not increase by so much as to end up reducing the deficit.
The increased G is only partially, not fully self-financing
•
2a) G constant, tax rate increases, a direct increase in tax revenue, but also a decline of
tax collection because income falls. Direct effect always dominates: higher taxes improve
the budget situation, the deficit is going down.
•
2b) G constant. A tax cut, a direct decrease in tax revenue, but also an increase in tax
collection because income goes up. Direct effect dominates – a reduction of budget
deficit not possible
21
G=250, MPC=0.75, t=0.2, M=2.5=1/1-0.75(1-0.2)
(1)
Change in G
MPC
(2)
Tax rate
(3)
Multiplier
(4)=(3)x(1)
Change in Y
(5)=(2)x(4)
Change in
taxes
(6)=(1)-(5)
Change in
deficit
100
0.75
0.2
2.5
250
50
50
100
0.9
0.2
3.57
357
71.4
28.6
100
0.7
0.4
1.72
172
68.8
31.2
22
Poland’s budget 2011 and 2012
• Budget deficit 2011 ca 25 billion PLN, 2.0% of GDP
• Budget deficit 2012 30.4 billion PLN, 2,1% 9f GDP
• Revenues structure: (2008): tax revenues 80.95%,
no-tax revenues 6,53%, EU funds 12,52%
• High percentage of expenditure regulated by law in
GDP (2011)- 74 %,
•
the share of social expenditure 41%, OECD countries
30% only
• The national debt (2011) 53%GDP
23
US budget situation 2013
• National debt 2012= 100% of GDP
• Reduction of expenditure together with moderate increase
of tax rate needed
• But political gridlock: republicans against tax increase
• March 1. 2013. the law on automatic reduction of budget
spending in force. Accepted by the Congress 1.5 year ago
• Effects of the law: drastic reduction of expenditure in 2
sectors: deffence and education
• Higher unemployment in those sectors, danger of recession
• Opinion of the Council of Economic Advisers to the
President: the rate of growth will decrease by0.5%,
unemployment will increase by 1 mln.
24
Fiscal policy
•
•
Changes in budget revenues and expenditure change aggregate
demand level. Increase in G and decrease in NT may stimulate
growth of AD
•
Active use of fiscal policy can get the economy close to its
potential level,
•
Tools of fiscal policy: a) public investment, b)programs supporting
employment (subsidies to firms creating new jobs, c)increase in
social transfers, tax cut
•
Limited effects because of: recognition lag, legislation lag
(gridlock), implementation lag.
•
Automatic stabilizers: mechanism that reduces the response of
GNP to shifts in aggregate demand caused by oil shock for
example or the war
•
Main automatic stabilizers: unemployment benefits, the income
tax
•
25
the multiplier with proportional taxes
MPC
t
MPC’=
MPC(1-t)
multiplier
1/1-MPC’
0.9
O
0.90
10.00
0.9
0.2
0.72
3.57
0.7
0
0.70
3.33
0.7
0.2
0.56
2.27
0.7
0.4
0.42
1.72
26
Foreign trade and income determination
• Y=C+I+G+Ex-Im
• The marginal propensity to import: the increase in
imports per 1$ increase in national income
• Multiplier in the open economy
1/1-(MPC’-MPI) = 1/1-MPC’+MPI
• Does imports steal jobs at home? Yes but it is
dangerous view. It can lead to world wide
restriction of trade.
• Recession – a need for world-wide expansionary
policies not for policies in which each country
attempts to steal employment from abroad
27