İktisada Giriş II General Description of Economy fatihbook.com 1 ECON 102 | AHMET KARA I. General Description of Economy 1) A model with households and firms (Closed Economy) 2) A model with households, firms and government (Closed Economy) 3) A model with households firms, government and the rest of the world (Open Economy) II. Concepts of National Output and Income 1.Gross National Product (GNP) (Gayri Safi Milli Hasıla) a) Definition • Nominal Gross National Product (Nominal GNP): The total value, at current market prices, at all final goods and services produced by a nation during a year. • Real Gross National Product (Real GNP): deflator GNP GNP Nominal GNP Real = – GNP deflator: The price index which measures the average price of the components of GNP relative to a base year It is nominal GNP corrected for inflation Example: Nominal GNP : 300 GNP deflator : 2 I. General Description of Economy 1) A model with households and firms 2) A model with households, firms and government 3) A model with households firms, government and the rest of the world II. Concepts of National Income (Output) 1) Gross National Product (GNP) 2) Net National Product (NNP) 3) National Income (NI) 4) Gross Domestic Product (GDP) fatihbook.com 2 Real GNP : 150 2 300 = b) Measuring GNP 1) Product Approach: We can measure GNP by calculating (and adding up) the expenditures made on final goods and services by households, firms, the government and the rest of the world M X G I C GNP - + + + = C = Consumption Expenditures (Expenditures made on final goods and services by households) I = Investment Expenditures (Expenditures made on final foods and services by firms) G = Government Expenditures (Expenditures made on final goods and services by the governmet) X = Exports M = Imports – The net expenditure made by foreigners on the final goods and services a nation produces during a year – Depreciation (Aşınma Payı) : The amount of capital used up as warn out during the period in question – Example: (C) Consumption exp : 300 (I) Gross Investment exp : 200 (G) Government exp : 100 (X) Export : 200 (M) Import : 100 Depreciation : 50 a) GNP= 700 100 200 100 200 300 = - + + + b) Net Investment= on depreciati - Investment Gross = 50 200 - =150 2) Income Approach: We can measure GNP by calculating the incomes generated in the process of producing the final goods and services in GNP. taxes indirect on depreciati employment self from Income Profit Interest Rent Salaries and Wages GNP + + + + + + = • Net National Product (NNP) on depreciati GNP NNP - = M - X G Investment Net C NNP + + + = • National Income (NI) (Milli Gelir) Taxes Indirect NNP NI - = taxes indirect on depreciati GNP NI - - = Example: C : 600 Wages and Salaries : 300 I : 400 Rent : 250 G : 200 Profit : 200 X : 400 Interest : 150 M : 200 Income from… : 100 Depreciation: 200 Indirect Taxes : 200 a) Product Approach GNP= 1400 200 400 200 400 600 = - + + + Net Exports = X - M I = Gross Invesment = Net Invesment + depreciation fatihbook.com 3 b) Income Approach GNP= 1400 200 200 100 150 200 250 300 = + + + + + + c) NNP= GNP - depreciation 1200 200 1400 = - d) NI= NNP - Indirect Taxes 1000 200 1200 = - • Gross Domestic Product (GDP) (Gayri Safi Yurtiçi Hasıla) Value of total output (final foods and services) produced inside a country during a year A few examples illustrating the goods and services included in GDP 1) A car (Toyota) produced by Japanese firm in Istanbul is included in Turkey’s GDP, but in Japan’s GNP 2) A good produced by a Turkish firm in Iraq is included in Iraq’s GDP, but in Turkey’s GNP abroad from income property net GDP GNP + = Models of National Income Determination I. Models with households and firms 1. Components of aggregate (total) and firms I C D A + = a) Consumption Demand: We will assume that consumption demand in the economy depends on “disposable income” Disposable income is the income households have available for spending (consumption) and/or saving. r D T T Y Y + - = Disposable Income = National Income – Direct Taxes + Transfer Payments Aggregate Demand = Consumption Demand + Investment Demand I. Models with households and firms 1. Components of aggregate and firms a) Consumption demand b) Investment demand 2. Equilibrium a) Definition b) Adjustment towards equilibrium 3. Shifts in Aggregate Demand II. Models with households firms and a government 1. Models with no net taxes 2. Models with net taxes III. Models with households firms, a government and the rest of the world IV. Multiplies fatihbook.com 4 In an economy with only households and firms, no government exists, thus 0 T 0 T R = = Therefore Y Y D = We will assume that consumption demand linearly depends on disposable incomes. In General ) Y ( f C D = Linear Consumption Function: Y b a C D · + = , a>0 , 0 £ b £ 1 If 0 Y D = 0 b a C · + = a C = D Y c b D D = a: Autonomous Consumption (The level of consumption unrelated to disposable income) b: Marginal Propensity to Consume (MPC) (The extra amount households wish to consume when they receive an extra dollar of disposable income. In other words, it is the fraction of each extra dollar of disposable income households wish to consume) Example: C = 1000 + 0,8. Y D and if Y D =0 C = 1000 + 0,8. 0 C = 1000 D D D D D Y b a Y ) Y b a ( Y C Y S · - - = · + - = - = D Y ) b 1 ( a S - - = Example: C = 1000 + 0,8 x Y D S = Y D -C = Y D -(1000 + 0,8 x Y D ) => Y D -1000 – 0,8 x Y D = -1000 + (1-0,8) Y D S = -1000 + 0,2 x Y D b = MPC (Marginal Propensity to Consume) 1-b = MPS (Marginal Propensity to Save) 1 MPS MPC = + b) Investment Demand: We will assume, the time being, investment demand is autonomous. That is to say, it doesn’t depend on national income. I = I 0 0 D I Y b a AD + · + = Since in this economy, there is no government bY I a AD 0 + + = Aggregate Demand = AD = C + I Saving = Disposable Income - Consumption x y y= a+mx Y D C C= 1000+0,8.Y D 1000 C AD C+I= a+I 0 +bY = AD Y D - 1000 S= -1000+0,2.Y D fatihbook.com 5 Example: C = 1000 + 0,8. Y D and if Y D =Y I = 500 Find AD and draw its graph… Solution: AD = C + I = 1000 + 0.8 x Y + 500 = 1500 + 0,8 x Y 2. Equilibrium In the short-run, suppose that wages and prices are fixed. The output market is said to be in short-run equilibrium when aggregate demand is equal to produced. Eguilibrium = Y (Output Produced) = AD Example: C = 1000 + 0,8. Y D and if Y D =Y I = 500 Find the equilibrium and show on graph… Solution: Equilibrium = Y = AD = 1000 + 0.8 x Y + 500 = 1500 + 0,8 x Y Y - 0,8 x Y = 1500 (1 - 0,8) x Y = 1500 0,2 x Y = 1500 Y = 1500 : 0,2 Equilibrium = Y = 7500 Adjustment towards equilibrium a) Suppose that actual output is lass than eqbm output (Y1 Aggregate Demand (AD) Producers increase output Homework: C = 800 + 0,75. Y D and Y D =Y I = 200 Find the equilibrium and show on graph… Y I 0 C = a+bY a AD AD= 1500+0,8.Y Y 1500 Y 45 0 AD AD (desired spending) Y* Y=AD Equilibrium Income (Output) Y AD=1500+0,8.Y Y*=7500 AD 1500 45 0 AD 1 Y 1 Y 1 Y* Y 2 Aggregate excess demand Y › Aggregate excess supply Y ? eqbm output 45 0 Quiz 2’s Topics National Income Determination Models and Multiplies fatihbook.com 6 b) Suppose that actual output is greater than the eqbm output. (Y2>Y*) at Y2, output > AD Producers reduce production II. Models with households firms and a government 1. Models with no (zero) net taxes Taxes Net - = - - = + - = Y Y T T Y T T Y Y D r r D ) ( If net taxes= 0 than Y Y D = I = I 0 G = G 0 and C = a+b.Y D , Y D =Y 0 0 G I Y b a AD D + + · + = Example: C = 250 + 0,75. Y D and if Y D =Y I = 500 G = 100 Find the equilibrium level of output and show on graph… Solution: Equilibrium = Y = AD = C + I + G = 250 + 0.75 x Y + 250 + 100 = 600 + 0,75 x Y Y - 0,75 x Y = 600 (1 - 0,75) x Y = 600 0,25 x Y = 600 Y = 600 : 0,25 Equilibrium = Y = 2400 (eqbm output, Y*) 2. Models with net taxes t).Y - (1 Y t.Y Y Taxes Net Y Y D D = - = - = Suppose that Net Taxes = t.Y, where t is the net tax rate Example: Y = 100 billion dollars t = 0.1 (10%) Find output the amount of disposable income in the economy and calculate the amount of net taxes a. Disposable Income 90 0.1).100 - (1 t).Y - (1 Y D = = = b. Net Taxes 10 0,1 t.Y Taxes Net = = = Example: C = 175 + 0,8. Y D and Y D = (1-t).Y t=0.25 I = 125 G = 200 Find the eqbm level of income (output) and show on a graph Solution: Equilibrium = Y = AD Disposable Inceome = National Inceome – Net Taxes Aggregate Demand = AD = C + I + G Disposable Inceome = National Inceome – Taxes + Transfer Payments Y C+I+G= AD C+I C Y* 45 0 AD Y AD=600+0,75.Y Y*=2400 600 Eqbm point AD 45 0 fatihbook.com 7 = C + I + G = 175 + 0.8 x Y + 125 + 200 = 500 + 0,6x Y Y - 0,6x Y = 500 (1 - 0,6) x Y = 500 0,4 x Y = 500 Y = 500 : 0,4 Equilibrium = Y = 1250 III. Models with households firms and a government and the rest of the world mY M X X G G I I b.Y a C 0 0 0 D = = = = + = t).Y - (1 Y D = Example: C = 400 + 0,75. Y D and Y D = (1-t).Y t=0.2 I = 300 X = 100 G = 200 M = 0,1.Y Find the eqbm level of output and show on a graph Solution: Equilibrium = Y = AD = C + I + G + X - M = 400 + 0.75 x Y + 300 + 200 +100 – 0,1.Y = 1000 + 0,75 (1 – 0.2) x Y – 0,1.Y = 1000 + 0,6.Y – 0,1.Y Y - 0,5 x Y = 1000 (1 - 0,5) x Y = 1000 Y = 1000 : 0,5 Equilibrium = Y = 2000 The Multiplier Process Example: C = 100 + 0,75. Y D and Y D = Y I = 50 (MPC) Suppose that investment is increased by 100, by how much does Y (national income) increase? ?I = 100 ?Y = 100 + 0,75.100 + 0,75(0,75.100)+… = 100 (1 + 0,75 + 0,75 2 + 0,75 3 +…) = 100 ? ? ? ? ? ? ? ? - 75 , 0 1 1 (MPC = Marginal Propensity Consume) = 100. ? ? ? ? ? ? ? ? 25 , 0 1 = 100.4 = 400 1) Closed Economy with Zero (no) Net Taxes C = a + b. Y D , Y D = Y I = I 0 (MPC) G = G 0 Autonomous Spending Multiplier = MPC - 1 1 Multiplies Formulas for Autonomous Spending • Investment spending multiplier = ?I ?Y • Government spending multiplier = ?G ?Y Homework: C = 150 + 0,75. Y D and Y D =(1-t).Y 3 1 = t I = 150 X = 150 G = 150 M = 0,1.Y Find the level of output and show on graph… Y AD=500+0,6.Y Y*=1250 500 AD Marginal propensity to import the function each extra dollars of national income domestic wish to spend on imports Y AD=1000+0,5.Y Y*=2000 1000 AD 45 0 45 0 fatihbook.com 8 Example: C = 50 + 0,8.Y D and Y D = Y I = 50 G = 50 a) Calculate the investment spending multiplier b) If investment is increased by 100, by how much does Y (national income) increase? a) 5 0,2 1 0,8 1 1 MPC 1 1 ?I ?Y = = - = - = b) ?Y = 100 ?I ?Y = 100 ?Y = 5. ?I ?Y = 500 2) A Closed Economy with Positive Net Taxes 0 0 D G G I I b.Y a C = = + = rate tax net the : t 0 t t).Y (1 Y D > - = Autonomous Spending Multiplier = t) - MPC.(1 - 1 1 Example: C = 50 + 0,8.Y D and Y D = (1-t).Y t=0.25 I = 50 G = 50 a) Calculate the investment spending multiplier b) If investment is increased by 100, by how much does Y increase? c) In order to increase Y (national income) by 500, by how much should investment be increased? a) 0,25) - 0,8.(1 1 1 t) - MPC.(1 1 1 ?I ?Y - = - = 5 , 2 4 , 0 1 0,6 1 1 0,75 0,8 - 1 1 = = - = · = b) ?I = 100 and ?Y = ? ?I ?Y = 2,5 ?Y = 2,5. ?I = 2,5.100 ?Y = 250 c) ?Y = 500 and ?I = ? ?I ?Y = 2,5 ?Y = 2,5. ?I 500 = 2,5. ?I ?I = 200 2,5 500 =