10 - 1Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

Aggregate Expenditures

The Multiplier,

Net Exports,

and Government

10C H A P T E R

10 - 2Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

CHANGES IN EQUILIBRIUM GDPAND THE MULTIPLIER

Pri

vate

sp

end

ing

(b

illio

ns

of

do

llars

)

o45

o

Real domestic product, GDP (billions of dollars)

510

490

470

450

430

430 450 470 490 510

(C + Ig ) 0

(C + Ig ) 1

Equilibrium GDPat Ig0 level of investment

Equilibrium GDPat Ig1 level of investment

Increasesin the levelof C + Ig

10 - 3Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

CHANGES IN EQUILIBRIUM GDPAND THE MULTIPLIER

Pri

vate

sp

end

ing

(b

illio

ns

of

do

llars

)

o45

o

Real domestic product, GDP (billions of dollars)

510

490

470

450

430

430 450 470 490 510

Equilibrium GDPat Ig2 level of investment

(C + Ig ) 0

(C + Ig ) 2

Decreasesin the levelof C + Ig

10 - 4Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

Changein GDP =Multiplier x initial change

in spending

THE MULTIPLIER EFFECT

Multiplier =Change in Real GDP

Initial Change in Spending

Inverse relationship betweenMultiplier & MPS

The Multiplier Effect and the Marginal Propensities

10 - 5Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

Change inGDP = Multiplier x initial change

in spending

Multiplier = or 1

MPS

1

1 - MPC

THE MULTIPLIER EFFECT

.9

.8

.75

.67

.5

10

5

4

3

2

MPC Multiplier

MPC and the Multiplier

10 - 6Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

INTERNATIONAL TRADE AND EQUILIBRIUM OUTPUT

Net ExportsPositive if exports > imports

Negative if imports > exportsNet Exports and Aggregate Expenditures

C + Ig + ( X – M )Xn = ( X – M )C + Ig + Xn

10 - 7Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

INTERNATIONAL TRADE AND EQUILIBRIUM OUTPUT

Net Export ScheduleNet Exports and

Equilibrium GDP•Positive Net Exports•Negative Net Exports

Graphically…

10 - 8Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

INTERNATIONAL TRADE AND EQUILIBRIUM OUTPUT

Pri

vate

sp

end

ing

(b

illi

on

s o

f d

oll

ars)

o45o

Real domestic product, GDP (billions of dollars)

510

490

470

450

430

430 450 470 490 510

Aggregate Expenditureswith Positive Net Exports

C + Ig

C + Ig + Xn1

Net

Exp

ort

s, X

n

(bil

lio

ns

of

do

lla

rs)

+5

0

-5

430 450 470 490 510 Real GDP

10 - 9Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

INTERNATIONAL TRADE AND EQUILIBRIUM OUTPUT

Pri

vate

sp

end

ing

(b

illi

on

s o

f d

oll

ars)

o45o

Real domestic product, GDP (billions of dollars)

510

490

470

450

430

430 450 470 490 510

Aggregate Expenditureswith Negative Net Exports

C + Ig C + Ig + Xn2

Net

Exp

ort

s, X

n

(bil

lio

ns

of

do

lla

rs)

+5

0

-5

430 450 470 490 510 Real GDP

10 - 10Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

INTERNATIONAL ECONOMICLINKAGES

• Prosperity Abroad

• Tariffs

• Exchange Rates

10 - 11Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

GLOBAL PERSPECTIVENET EXPORTS OF GOODS, 1999

Source: World Trade Organization

-400 -140 -100 -60 -20 0 20 60 100

Negative Net Exports Positive Net Exports

Billions of Dollars

United States

United Kingdom

Canada

France

Germany

Italy

Japan

10 - 12Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

ADDING THE PUBLIC SECTOR

Simplifying Assumptions• Investment and Net Exports

are Independent of the Level of GDP

• Government Purchases Do Not Affect Private Spending

• All Taxes are Personal• Tax Collections are Fixed• Unless Stated Otherwise, Price

Level is Constant

10 - 13Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

ADDING THE PUBLIC SECTOR

Ag

gre

gat

e E

xpen

dit

ure

s (b

illio

ns

of

do

llars

)

o45

o

Real domestic product, GDP (billions of dollars)

470 550

C

C + Ig + Xn

C + Ig + Xn + GGovernmentSpending of$20 Billion

Government Purchases and Equilibrium GDP

10 - 14Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

ADDING THE PUBLIC SECTORLump-Sum Tax and Equilibrium GDP

Ag

gre

gat

e E

xpen

dit

ure

s (b

illio

ns

of

do

llars

)

o45

o

Real domestic product, GDP (billions of dollars)

490 550

C + Ig + Xn + G

Ca + Ig + Xn + G

$15 Billion Decreasein Consumption froma $20 Billion Increasein Taxes

10 - 15Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

ADDING THE PUBLIC SECTOR

InjectionsLeakagesUnplanned Changes in

InventoriesBalanced Budget

MultiplierRecessionary GapInflationary Gap

10 - 16Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

FULL-EMPLOYMENT GDP

Ag

gre

gat

e E

xpen

dit

ure

s (b

illio

ns

of

do

llars

)

o45

o

Real domestic product, GDP (billions of dollars)

490 510 530

AE0

Recessionary Gap

AE1

530

510

490

Recessionary Gap= $5 Billion

Full Employment

10 - 17Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

FULL-EMPLOYMENT GDP

Ag

gre

gat

e E

xpen

dit

ure

s (b

illio

ns

of

do

llars

)

o45

o

Real domestic product, GDP (billions of dollars)

490 510 530

AE0

Inflationary Gap

AE2

530

510

490

Inflationary Gap= $5 Billion

Full Employment

10 - 18Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

APPLICATIONS OF THE MODEL

•Great Depression•Vietnam War Inflation•The End of the Japanese Growth “Miracle”

10 - 19Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

LIMITATIONS OF THE MODEL

•Does Not Show Price-Level Changes

•Ignores Premature Demand-Pull Inflation

•Bars Real GDP Beyond Full-Employment

•Does Not Deal With Cost-Push Inflation

10 - 20Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

multipliernet exportslump-sum taxbalanced-budget multiplierrecessionary gapinflationary gap

Copyright McGraw-Hill/Irwin, 2002ENDBACK

10 - 22Copyright McGraw-Hill/Irwin, 2002

Changes in Equilibrium GDP and the Multiplier

The Multiplier Effect

International Trade and Equilibrium Output

International Economic Linkages

Adding the Public Sector

Full-Employment GDP

Applications of the Model

Limitations of the Model

Key Terms

PreviousSlide

NextSlide

EndShow

Coming Next:

AGGREGATE DEMANDAND

AGGREGATE SUPPLY

CHAPTER 11