section 2 - How is GDP decided GDP=C I G X-M C-household...

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How is GDP decided? GDP=C+I+G+X-M C-household spending (consumption) -longest most stable component. I-Business Spending (Investing) G-Government Spending X-export M-import Transfer Payments - Social Security, Welfare, etc. -government does not get anything in return CONSUMPTION (C) C=c1+bY C=100+0.8Y -----------Keynes consumption model -c1- autonomous consumption (100) -bY- Marginal propensity to consume. (0.8Y) - the left over 0.20 is called MPS (Marginal propensity to save) -MPC+MPS= 1 whole Y (income) C (Spending) 1 0.80 0.80 0.64 0.50 0.40 Spending Multiplier= - 11 MPC 100x5=500 = -. = 11 8 5 Public saving- govt. saves money. Private saving- corporations Public + Private = National Saving = Investment C=200+0.75Y SPENDING MULTIPLIER= 1/1-.75=1/.25=4 Y=200X4=800 C=200+.75(800)=800 Y C S I G
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Autonomous Consumption 50 MPC- Anytime that your income goes up. You spend $0.90 of it. MPS- The $0.10 is what you save Spending Multiplier = - = -. = . = 11 MPC 11 9 1 1 10 With G=100 I=50 C=50+.9(2000)
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section 2 - How is GDP decided GDP=C I G X-M C-household...

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