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Week_3_-_Aggregate_Expenditure

# Week_3_-_Aggregate_Expenditure - 1 ECMA06 Aggregate...

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1 ECMA06 – Aggregate Expenditure Aggregate Expenditure – The Simplest Short-Run Model Outline Why do we want to develop a model that determines GDP. Build a simple model that determines equilibrium national income. The simple model consists of consumption and investment only (will take into account of the government and the foreign sector next week). Discuss the adjustment mechanism. Consider how does a change in exogenous variable affect national income (we will also discuss the multiplier).

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2 Why Do We Want to Develop a Model that Determines National Income? Question: Does demand (planned expenditure) always equal to supply (actual expenditure)? Answer: Not necessary! But why? (Aggregate) Demand (AD) = desired expenditure (what we intended to spend): AD = C + I + G + X – IM. (Aggregate) Supply = actual expenditure = actual national income: GDE = C + I + G + X – IM. The key difference is investment (I) in GDE includes unintended change in inventories while investment (I) in AD includes only intended investment .
3 ECMA06 – Aggregate Expenditure It is certainly true that every act of production generates income for Canadians; however , not all of that income gets translated into demand for the output of firms. We want a model that has some positive relationship between The income generated by production and The demand that exists for that production Model of the Macro Economy Exogenous Variables vs. Endogenous Variables Any model must consist 2 types of variables – exogenous variables and endogenous variables. Exogenous variables – these are given to the model (i.e., they are constants and you do not need to solve for them).

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