BASIC MACROECONOMIC RELATIONSHIPS

Pertemuan 6

Matakuliah : J0594-Teori EkonomiTahun : 2009

Bina Nusantara University 3

Basic Relationships

• Income-Consumption• Income-Saving• 45° Line• C = DI on the Line• S = DI - C

Bina Nusantara University 4

Consumption and Saving

• The Consumption Schedule• The Saving Schedule• Break-Even Income• Average Propensity to Consume (APC)• Average Propensity to Save (APS)

APS =SavingIncome

APC =Consumption

Income

Bina Nusantara University 5

Consumption and Saving

• Marginal Propensity to Consume (MPC)• Marginal Propensity to Save (MPS)

MPC =Change in Consumption

Change in Income

MPS =Change in Saving

Change in Income

Bina Nusantara University 6

Consumption and Saving

(1)Level ofOutput

AndIncome

(GDP=DI)

(2)Consump-

tion(C)

(3)Saving (S)

(1-2)

(4)Average

Propensityto Consume

(APC)(2)/(1)

(5)Average

Propensityto Save(APS)(3)/(1)

(6)Marginal

Propensityto Consume

(MPC)Δ(2)/Δ(1)

(7)Marginal

Propensityto Save(MPS)

Δ(3)/Δ(1)

(1) $370

(2) 390

(3) 410

(4) 430

(5) 450

(6) 470

(7) 490

(8) 510

(9) 530

(10) 550

$375

390

405

420

435

450

465

480

495

510

$-5

0

5

10

15

20

25

30

35

40

1.01

1.00

.99

.98

.97

.96

.95

.94

.93

.93

-.01

.00

.01

.02

.03

.04

.05

.06

.07

.07

.75

.75

.75

.75

.75

.75

.75

.75

.75

.25

.25

.25

.25

.25

.25

.25

.25

.25

Bina Nusantara University 7

500

475

450

425

400

375

45°

Consumption and Saving

50

25

0

370 390 410 430 450 470 490 510 530 550

370 390 410 430 450 470 490 510 530 550

Consumption and Saving Schedules

C

S

ConsumptionSchedule

Saving Schedule

Saving $5 Billion

Dissaving $5 Billion

Dissaving$5 Billion

Saving $5 Billion

Disposable Income (billions of dollars)

Co

nsu

mp

tio

n (

bil

lio

ns

of

do

llar

s)S

avin

g(b

illi

on

s o

f d

oll

ars

)

Bina Nusantara University 8

GLOBAL PERSPECTIVE

Consumption and Saving

Source: Statistical Abstract of the United States, 2006

Average Propensities to Consume Select Nations GDPs

United States

Canada

United Kingdom

Japan

Germany

Netherlands

Italy

France

.80 .85 .90 .95 1.00

.963

.958

.953

.942

.896

.893

.840

.833

Average Propensities to Consume

Bina Nusantara University 9

Consumption and Saving• MPC + MPS = 1• MPC and MPS as Slopes• Nonincome Determinants of

Consumption and Saving– Wealth Effect– Expectations– Real Interest Rates– Household Debt

Bina Nusantara University 10

Consumption and Saving• Other Important Considerations

• Changes Along Schedules

• Switch to Real GDP

• Schedule Shifts

• Stability

• Taxation

Bina Nusantara University 11

Interest Rate and Investment

• Expected Rate of Return (r)• The Real Interest Rate (i) • Meaning of r = i• Investment Demand Curve

Bina Nusantara University 12

Interest Rate and Investment

ExpectedRate of

Return (r)

CumulativeAmount ofInvestmentHaving This

Rate ofReturn or Higher

(i)

16%14%12%10%

8%6%4%2%0%

$ 05

10152025303540

r a

nd

i (

pe

rce

nt)

16

14

12

10

8

6

4

2

05 10 15 20 25 30 35 40

Investment (billions of dollars)

The Investment Demand Curve

ID

Bina Nusantara University 13

Interest Rate and Investment• Shifts of the Investment

Demand Curve– Acquisition, Maintenance, and

Operating Costs– Business Taxes– Technological Change– Stock of Capital Goods on Hand– Expectations

Bina Nusantara University 14

Interest Rate and Investment r

an

d i

(p

erc

en

t)

0

Investment (billions of dollars)

Shifts in the Investment Demand Curve

ID0ID1ID2

Increase in Investment Demand

Decrease in Investment Demand

Bina Nusantara University 15

Interest Rate and Investment

• Instability of Investment– Durability– Irregularity of Innovation– Variability of Profits– Variability of Expectations

Bina Nusantara University 16

The Multiplier Effect

Multiplier =Change in Real GDP

Initial Change in Spending

The Multiplier and the Marginal Propensities

Multiplier =1

1 - MPC

Multiplier =1

MPS

-or-

Graphically…

W 8.2

Bina Nusantara University 17

The Multiplier Effect(1)

Change inIncome

(2)Change in

Consumption(MPC = .75)

(3)Change in

Saving(MPC = .25)

Increase in Investment of $5Second RoundThird RoundFourth RoundFifth RoundAll other rounds Total

$ 5.003.752.812.111.584.75

$ 20.00

$ 3.752.812.111.581.193.56

$ 15.00

$ 1.25.94.70.53.39

1.19$ 5.00

Tabular and Graphical Views

Rounds of Spending1 2 3 4 5 All

$20.00

15.2513.67

11.56

8.75

5.00 $5.00

$3.75

$2.81

$2.11$1.58

$4.75

ΔI=$5 billion

Bina Nusantara University 18

The Multiplier EffectThe MPC and the Multiplier

10

5

4

3

2.5

.67

.75

.8

.9

MPC Multiplier