10 - 1Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
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The Aggregate Expenditures Model
10C H A P T E R
10 - 2Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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Aggregate Expenditures ModelSimplifications...
•A Private Closed Economy•Defer Government & Taxes•Defer Exports and Imports•Real GDP = DI•Excess Production Capacity •Unemployed Labor Exists•More Aggregate Expenditures Doesn’t Affect Price Level
10 - 3Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
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INVESTMENT DEMAND & SCHEDULE
Exp
ecte
d r
ate
of
retu
rn,
r, a
nd
real
in
tere
st r
ate,
i (
per
cen
ts)
Inve
stm
ent
(bil
lio
ns
of
do
lla
rs)
Investment(billions of dollars)
20
8
20
Real Domestic Product, GDP(billions of dollars)
I D
Ig
InvestmentDemandCurve
InvestmentSchedule
2020
10 - 4Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
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EQUILIBRIUM GDP
GDP = C + Ig
Real Domestic OutputAggregate Expenditures Schedule
Equilibrium GDP
Disequilibrium
Graphical Analysis…
10 - 5Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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Pri
vate
sp
end
ing
, C +
I g
(bill
ion
s o
f d
olla
rs)
o45
o
C
C + Ig
Ig = $20 Billion
Equilibrium
Real domestic product, GDP (billions of dollars)
370 390 410 430 450 470 490 510 530 550
(C + I g = GDP)
EQUILIBRIUM GDP
C =$450 Billion
$530
510
490
470
450
430
410
390
370
10 - 6Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
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EQUILIBRIUM GDPSaving and Planned
Investment are Equal•Leakage•Injection
No Unplanned Changes in Inventories•Above Equilibrium•Below Equilibrium•Actual Investment
10 - 7Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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CHANGES IN EQUILIBRIUM GDPAND THE MULTIPLIER
Pri
vate
sp
end
ing
(b
illio
ns
of
do
llars
)
o45
o
Real domestic product, GDP (billions of dollars)
510
490
470
450
430
430 450 470 490 510
(C + Ig ) 0
(C + Ig ) 1
Equilibrium GDPat Ig0 leveEquilibrium GDP
at Ig1 level of investmentl of investment
Increasesin the levelof C + Ig
10 - 8Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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CHANGES IN EQUILIBRIUM GDPAND THE MULTIPLIER
Pri
vate
sp
end
ing
(b
illio
ns
of
do
llars
)
o45
o
Real domestic product, GDP (billions of dollars)
510
490
470
450
430
430 450 470 490 510
Equilibrium GDPat Ig2 level of investment
(C + Ig ) 0
(C + Ig ) 2
Decreasesin the levelof C + Ig
10 - 9Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
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INTERNATIONAL TRADE AND AGGREGATE EXPENDITURES
Net ExportsPositive if exports > imports
Negative if imports > exportsNet Exports and Aggregate Expenditures
C + Ig + ( X – M )Xn = ( X – M )C + Ig + Xn
10 - 10Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
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INTERNATIONAL TRADE AND AGGREGATE EXPENDITURES
Net Export ScheduleNet Exports and
Equilibrium GDP•Positive Net Exports•Negative Net Exports
Graphically…
10 - 11Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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INTERNATIONAL TRADE AND AGGREGATE EXPENDITURES
Pri
vate
sp
end
ing
(b
illi
on
s o
f d
oll
ars)
o45o
Real domestic product, GDP (billions of dollars)
510
490
470
450
430
430 450 470 490 510
Aggregate Expenditureswith Positive Net Exports
C + Ig
C + Ig + Xn1
Net
Exp
ort
s, X
n
(bil
lio
ns
of
do
lla
rs)
+5
0
-5
430 450 470 490 510 Real GDP
10 - 12Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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INTERNATIONAL TRADE AND AGGREGATE EXPENDITURES
Pri
vate
sp
end
ing
(b
illi
on
s o
f d
oll
ars)
o45o
Real domestic product, GDP (billions of dollars)
510
490
470
450
430
430 450 470 490 510
Aggregate Expenditureswith Negative Net Exports
C + Ig C + Ig + Xn2
Net
Exp
ort
s, X
n
(bil
lio
ns
of
do
lla
rs)
+5
0
-5
430 450 470 490 510 Real GDP
10 - 13Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
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INTERNATIONAL ECONOMICLINKAGES
• Prosperity Abroad
• Tariffs
• Exchange Rates
10 - 14Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
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GLOBAL PERSPECTIVENET EXPORTS OF GOODS, 2001
Source: World Trade Organization
-400 -140 -100 -60 -20 0 20 60 100
Negative Net Exports Positive Net Exports
Billions of Dollars
United States
United Kingdom
Canada
France
Germany
Italy
Japan
10 - 15Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
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ADDING THE PUBLIC SECTOR
Simplifying Assumptions•Government Purchases do not Affect Consumption and Investment Spending
•All Taxes are Personal•Tax Collections are Fixed
Graphically…
10 - 16Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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ADDING THE PUBLIC SECTOR
Ag
gre
gat
e E
xpen
dit
ure
s (b
illio
ns
of
do
llars
)
o45
o
Real domestic product, GDP (billions of dollars)
470 550
C
C + Ig + Xn
C + Ig + Xn + GGovernmentSpending of$20 Billion
Government Purchases and Equilibrium GDP
10 - 17Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
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ADDING THE PUBLIC SECTORLump-Sum Tax and Equilibrium GDP
Ag
gre
gat
e E
xpen
dit
ure
s (b
illio
ns
of
do
llars
)
o45
o
Real domestic product, GDP (billions of dollars)
490 550
C + Ig + Xn + G
Ca + Ig + Xn + G
$15 Billion Decreasein Consumption froma $20 Billion Increasein Taxes
10 - 18Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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FULL-EMPLOYMENT GDP
Ag
gre
gat
e E
xpen
dit
ure
s (b
illio
ns
of
do
llars
)
o45
o
Real domestic product, GDP (billions of dollars)
490 510 530
AE0
Recessionary Gap
AE1
530
510
490
Recessionary Gap= $5 Billion
Full Employment
10 - 19Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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FULL-EMPLOYMENT GDP
Ag
gre
gat
e E
xpen
dit
ure
s (b
illio
ns
of
do
llars
)
o45
o
Real domestic product, GDP (billions of dollars)
490 510 530
AE0
Inflationary Gap
AE2
530
510
490
Inflationary Gap= $5 Billion
Full Employment
10 - 20Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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InjectionsLeakagesUnplanned Changes in Inventories
Recessionary GapInflationary Gap
FULL-EMPLOYMENT GDP
10 - 21Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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APPLICATIONS OF THE MODEL
•U.S. Recession of 2001
•U.S. Inflation in the Late 1980s
10 - 22Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
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LIMITATIONS OF THE MODEL
•Does Not Show Price-Level Changes
• Ignores Premature Demand-Pull Inflation
•Limited Real GDP to the Full-Employment Level
•Does not Deal with Cost-Push Inflation
•Does not Allow for “Self-correction”
planned investmentinvestment scheduleaggregate expenditures scheduleequilibrium GDPleakageinjectionunplanned changes in inventoriesnet exportslump-sum taxrecessionary gapinflationary gap
Copyright McGraw-Hill/Irwin, 2005ENDBACK
10 - 24Copyright McGraw-Hill/Irwin, 2005
Aggregate Expenditures Model
Investment Demand and Schedule
Equilibrium GDP
Changes in Equilibrium GDP and the Multiplier
International Trade and Aggregate Expenditures
International Economic Linkages
Adding the Public Sector
Full-Employment GDP
Applications of the Model
Limitations of the Model
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Coming Next:
AGGREGATE DEMANDAND
AGGREGATE SUPPLY
CHAPTER 11