Lecture 3 - CHAPTER3 THEGOODSMARKET 1 of 28 2 of 28...

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CHAPTER 3 THE GOODS  MARKET 1 of 28
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Time Horizons The following discussion uses the short-run time horizon : When focusing on year-to-year movements in economic activity, economists concentrate on the interactions between aggregate production , income and demand Later we will switch to a medium run perspective, which extends the extreme short-run view by allowing for variable prices . 2 of 28
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Classical versus Keynesian In 1929, Great Depression. Classical Theory suggests that changes in output comes from factor supplies and technology No significant change in factor supplies and technology in Great Depression John Maynard Keynes suggest that changes in aggregate demand is responsible for aggregate output changes Government can reduce economic hardship by changing aggregate demand. 3 of 28
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Components of Demand Our model economy consists of four sectors : Households Firms The government The rest of the world All four sectors exhibit a certain demand for goods and services . 4 of 28
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Components of Demand In analyzing demand, we start from GDP once more. Remember, that we defined GDP as the value of all final goods and services produced in an economy in a specific period of time. Now, since in equilibrium all goods and service markets clear,aggregate output must equal aggregate demand . . 5 of 28
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The Composition of GDP Table 3-1 IN PROBLEM SET 1, The Composition of Turkish GDP, 2010 Turkish Lira Percent of GDP GDP (Y) 1 Consumption ( C ) 2 Investment ( I ) 3 Government spending ( G ) 4 Net exports Exports (X) Imports (IM) 5 Inventory investment Source: Turkish State Institute of Statistics. 6 of 28 3-1
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The Composition of GDP Consumption ( C ) All goods and services  consumed by households within one period. Investment ( I ) All capital goods acquired by  firms and households within one period. Government Spending ( G ) All goods and  services consumed by the public sector.     G  does not include transfers. 7 of 28
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Imports ( IM ) are the purchases of foreign goods and services by consumers, business firms, and the U.S. government. Exports ( X ) are the purchases of U.S. goods and services by foreigners. 8 of 28
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Lecture 3 - CHAPTER3 THEGOODSMARKET 1 of 28 2 of 28...

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