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Unformatted text preview: 1 1 Chapter 4 Consumption, Saving and Investment 2 Introduction ¡ In Chapter 3, we talked about the factors that determine the amount of output produced, or supplied. ¡ In this chapter, we consider the factors that determine the demand for goods and services. ¡ Recall the following identity: Y = C + I + G + NX 3 Introduction ¡ This identity tells us how output produced in the current period is used. ¡ Consumption (C): Household’s demand for goods and services. ¡ Investment (I): Firm’s demand for new capital goods. ¡ Government purchases of goods and services (G) ¡ Net Exports (NX): the net demand for domestic goods by foreigners. 4 Introduction ¡ Because the level of government purchases is determined primarily by the political process, we take G as something given. ¡ In this chapter, we consider a closed economy , that is an economy that do not engage in any international trade of goods and services and do not engage in international borrowing and lending. Result: Export = 0 and Import = 0, so NX = 0. 5 Introduction ¡ We begin by talking about individual’s consumption and saving decisions. ¢ How consumers’ demands for goods and services are affected by their income, wealth and the interest rate . ¡ Then we talk about firm’s decisions on how much to invest. ¡ Finally, we discuss the equilibrium in the goods market. 6 Consumption and Saving ¡ Saving is the amount left after a household or an individual decides how much to consume out of its income. ¡ The decisions on how much to consume and how much to save are actually two sides of the same coin. 2 7 Consumption and Saving ¡ If you want to save more today, you will have to consume less today. ¡ But by saving more and building up your wealth, you are able to consume more in the future. ¡ There is a trade-off between consumption today and consumption in the future ....
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This note was uploaded on 08/11/2008 for the course ECON 103a taught by Professor Suen during the Winter '08 term at UC Riverside.
- Winter '08