ECON 1113 1st Edition Lecture 9 Outline of Last Lecture I Recent Developments in the Labor Market II Real GDP and the Business Cycle Outline of Current Lecture I Introduction The Role of Consumer Spending in the Keynesian Short Run Model II Determinations of Consumer Spending III Two Basic Measures IV Two Basic Hypotheses about Consumer Spending V An Illustration Current Lecture I II The Role of Consumer Spending in the Keynesian Short Run Model A Named after John Maynard Keynes a British economist of the twentieth century B Based on his book The General Theory of Money Employment and Interest 1936 also known as The General Theory 1 This book is complex because of Keynes prose 2 It is summarized in the Keynesian Model by Sir John Hicks C Keynes believed that the overall of economic activity was determined by how much people plan on spending 1 Formalized as Plan Total Expenditure TE 2 Consumer Spending C spending on consumer goods and services 3 Investment Spending I spending on capital goods and services 4 Government Spending G government spending units on goods and services 5 Export Spending X foreign spending on domestic goods and services 6 Import Spending M spending on foreign goods and services 7 TE C I G X M 1 X M is also referred to as the trade balance D National Income Accounts 1 Tracks C I and G to measure Keynesian ideas 2 Created by Harvard s Simon Kuznet Determinations of Consumer Spending A Disposable After Tax Income 1 Yd Total Income Taxes or Yd y T 2 Yd income is a flow variable measured over some time period These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute B Credit Conditions 1 Reflected by the level of interest rates C Consumer Expectations about Future Consumer Goods Prices and or Future Disposable Income Levels D Consumer Wealth 1 A stock variable measured at a point in time 2 Value of assets minus value of liabilities wealth Two Basic Measures A Financial Wealth 1 Like stocks bonds savings accounts etc B Consumer Durable Goods 1 Like cares refrigerators washing machines furniture etc C Focus on relationship between consumer spending and disposable income ceteris paribus 1 Called Keynesian Consumption Function D Average Propensity to Consume APC 1 The fraction of disposable income after tax income spent on consumer goods C 2 APC C Yd 3 Example 1 Disposable Income 500 week 2 Consumer spending 400 week 3 APC 400 500 0 8 x 100 80 4 If someone does not consume part of income he probably saves it E Margin Propensity to Consume MPC 1 Change in consumer spending C brought about by change in disposable income Yd 2 MPC C Y d Two Basic Hypothesis about Consumer Spending A As Yd increases APC decreases 1 The rich spend smaller fraction of income on consumer goods and services unlike the poor who spend most of income on consumer goods B 0 MPC 1 1 Fundamental psychological law that people consume only a part of any increase in their disposable income An Illustration A The case of A involves dissaving which is accomplished by borrowing and or selling off assets garage sale effect B The case of B is breaking even in which consumer spending equals disposable income III IV V Yd Yd C C APC C Yd MPC S Y d C C Yd 0 5000 5000 A 0 5000 B 20 000 20 00 0 20 00 0 15 00 0 20000 20000 1 15000 20000 0 75 20000 20000 0 C 100 00 0 80 00 0 80 00 0 60 00 0 80000 100000 0 8 60000 80000 0 75 100000 80000 20000
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