BASIC MACROECONOMIC RELATIONSHIPS Pertemuan 6 Matakuliah: J0594-Teori Ekonomi Tahun: 2009.

BASIC MACROECONOMIC RELATIONSHIPS

Pertemuan 6

Matakuliah : J0594-Teori EkonomiTahun : 2009

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Basic Relationships

• Income-Consumption• Income-Saving• 45° Line• C = DI on the Line• S = DI - C

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Consumption and Saving

• The Consumption Schedule• The Saving Schedule• Break-Even Income• Average Propensity to Consume (APC)• Average Propensity to Save (APS)

APS =SavingIncome

APC =Consumption

Income

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Consumption and Saving

• Marginal Propensity to Consume (MPC)• Marginal Propensity to Save (MPS)

MPC =Change in Consumption

Change in Income

MPS =Change in Saving

Change in Income

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Consumption and Saving

(1)Level ofOutput

AndIncome

(GDP=DI)

(2)Consump-

tion(C)

(3)Saving (S)

(1-2)

(4)Average

Propensityto Consume

(APC)(2)/(1)

(5)Average

Propensityto Save(APS)(3)/(1)

(6)Marginal

Propensityto Consume

(MPC)Δ(2)/Δ(1)

(7)Marginal

Propensityto Save(MPS)

Δ(3)/Δ(1)

(1) $370

(2) 390

(3) 410

(4) 430

(5) 450

(6) 470

(7) 490

(8) 510

(9) 530

(10) 550

$375

390

405

420

435

450

465

480

495

510

$-5

0

5

10

15

20

25

30

35

40

1.01

1.00

.99

.98

.97

.96

.95

.94

.93

.93

-.01

.00

.01

.02

.03

.04

.05

.06

.07

.07

.75

.75

.75

.75

.75

.75

.75

.75

.75

.25

.25

.25

.25

.25

.25

.25

.25

.25

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500

475

450

425

400

375

45°

Consumption and Saving

50

25

0

370 390 410 430 450 470 490 510 530 550

370 390 410 430 450 470 490 510 530 550

Consumption and Saving Schedules

C

S

ConsumptionSchedule

Saving Schedule

Saving $5 Billion

Dissaving $5 Billion

Dissaving$5 Billion

Saving $5 Billion

Disposable Income (billions of dollars)

Co

nsu

mp

tio

n (

bil

lio

ns

of

do

llar

s)S

avin

g(b

illi

on

s o

f d

oll

ars

)

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GLOBAL PERSPECTIVE

Consumption and Saving

Source: Statistical Abstract of the United States, 2006

Average Propensities to Consume Select Nations GDPs

United States

Canada

United Kingdom

Japan

Germany

Netherlands

Italy

France

.80 .85 .90 .95 1.00

.963

.958

.953

.942

.896

.893

.840

.833

Average Propensities to Consume

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Consumption and Saving• MPC + MPS = 1• MPC and MPS as Slopes• Nonincome Determinants of

Consumption and Saving– Wealth Effect– Expectations– Real Interest Rates– Household Debt

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Consumption and Saving• Other Important Considerations

• Changes Along Schedules

• Switch to Real GDP

• Schedule Shifts

• Stability

• Taxation

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Interest Rate and Investment

• Expected Rate of Return (r)• The Real Interest Rate (i) • Meaning of r = i• Investment Demand Curve

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Interest Rate and Investment

ExpectedRate of

Return (r)

CumulativeAmount ofInvestmentHaving This

Rate ofReturn or Higher

(i)

16%14%12%10%

8%6%4%2%0%

$ 05

10152025303540

r a

nd

i (

pe

rce

nt)

16

14

12

10

8

6

4

2

05 10 15 20 25 30 35 40

Investment (billions of dollars)

The Investment Demand Curve

ID

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Interest Rate and Investment• Shifts of the Investment

Demand Curve– Acquisition, Maintenance, and

Operating Costs– Business Taxes– Technological Change– Stock of Capital Goods on Hand– Expectations

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Interest Rate and Investment r

an

d i

(p

erc

en

t)

0

Investment (billions of dollars)

Shifts in the Investment Demand Curve

ID0ID1ID2

Increase in Investment Demand

Decrease in Investment Demand

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Interest Rate and Investment

• Instability of Investment– Durability– Irregularity of Innovation– Variability of Profits– Variability of Expectations

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The Multiplier Effect

Multiplier =Change in Real GDP

Initial Change in Spending

The Multiplier and the Marginal Propensities

Multiplier =1

1 - MPC

Multiplier =1

MPS

-or-

Graphically…

W 8.2

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The Multiplier Effect(1)

Change inIncome

(2)Change in

Consumption(MPC = .75)

(3)Change in

Saving(MPC = .25)

Increase in Investment of $5Second RoundThird RoundFourth RoundFifth RoundAll other rounds Total

$ 5.003.752.812.111.584.75

$ 20.00

$ 3.752.812.111.581.193.56

$ 15.00

$ 1.25.94.70.53.39

1.19$ 5.00

Tabular and Graphical Views

Rounds of Spending1 2 3 4 5 All

$20.00

15.2513.67

11.56

8.75

5.00 $5.00

$3.75

$2.81

$2.11$1.58

$4.75

ΔI=$5 billion

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The Multiplier EffectThe MPC and the Multiplier

10

5

4

3

2.5

.67

.75

.8

.9

MPC Multiplier