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Karma
Class:  ECON 3340  Macro Economics 
Subject:  Economics 
University:  Lamar University 
Term:  Spring 2013 
Composition of GDP  (The Percentages are for USA in 2010)

Consumption (C)  Goods and services purchased by consumers. C = c0 + c1 Yd Consumption = theoretical consumption at 0 income + (propensity to consume x Disposable Income) c0 is y intercept c1 is slope Yd is Disposable income (Income  Taxes or Y  T) 
Investment (I)  The sum of residential and nonresidential investment. I = nonresidential + residential investment I = S + ( T  G ) I = c0 + ( 1  c1 ) ( Y  T ) + ( T  G ) S: private saving T: taxes G: government spending 
Government Spending (G)  Purchases of goods and services by federal, state, and local governments. Does NOT include government transfers like medicare, interest on debt, or social security. 
Trade Balance or Net Exports  The difference between exports (X) and imports (IM). If exports exceeds imports, country has a trade surplus If imports exceeds exports, country has a trade deficit Trade Balance = Exports  Imports NE = X  IM 
Inventory Investment  What is produced in a certain country is naturally also sold eventually, but some of the goods produced in a given year may be sold in a later year rather than in the year they were produced. Inventory Investment = Production  Sales 
Total Demand for Goods (Z) (Equation)  Z = C + I + G + X  IM Expanded: Z = c0 + c1(Y  T) + I + G Z: Demand C: Consumption I: Investment G: Government Spending X: Exports IM: Imports 
Disposable Income (Yd)  Income that remains once consumers have received transfers from government and paid taxes. When disposable income goes up people buy more goods, when it goes down they buy less. Yd = Y  T Y: Income T: Taxes This is an identity equation 
Consumption Function (Equation)  WIKIPEDIA: The consumption function is a single mathematical function used to express consumer spending. C = c0 + c1 Yd considered a "Behavioral Equation" C = C(Yd) defined as this in book but not really important to know. 
Propensity to Consume (c1)  Gives the effect an additional dollar of disposable income has on consumption. Is c1 in the consumption equation: C = c0 + c1 Yd Usually positive and less than 1 b/c people are likely to consume some but not all of additional income received. 
Endogenous  Variables that depend on other variables in the model. 
Exogenous  Variables not explained within the model but are instead taken as given. Example: (Until Ch 5)Investment, Government Spending, and Taxes. 
Fiscal Policy  The choice of taxes and spending by the government WIKIPEDIA: Fiscal policy is the use of government revenue collection and expenditure (spending) to influence the economy. 
Equilibrium in the Goods Market  (assuming inventory investment is always equal to zero) In equilibrium: Production is equal to demand. Demand depends on income, which is equal to production. Requires that Production (Y) be equal to the demand for goods (Z). Y = Z, which is an equilibrium condition. and since "Z = c0 + c1 (Y  T) + I + G" is true the following must also be true: Y = c0 + c1 (Y  T) + I + G 
Production, Income, and Demand (Two Equations)  Y = c0 + c1Y  c1T + I + G Rewritten after moving c1Y to left, reorganizing the right, and dividing both sides by (1  c1): Y = 1 [ c0 + I + G  c1T ] 1  c1 The part in brackets is autonomous spending, the part outside is called the multiplier. 
Autonomous Spending  The part of demand for goods that does NOT depend on output. Autonomous Spending = [ c0 + I + G  c1T ] If T = G (Balanced Budget), and the propensity to consume (c1) is less than 1, then (G  c1T) is positive and so is Autonomous Spending. Only by a very large budget surplus ( T > G) could autonomous spending be negative. 
Balanced Budget  A country runs a balanced budget when Taxes equals Government Spending. T = G If T = G, and the propensity to consume (c1) is less than 1, then (G  c1T) is positive and so is Autonomous Spending. 
Multiplier  Multiplies autonomous spending. Is greater than 1 Multiplier = 1 (1  c1) Example: if c0 increases by 1billion, output increases by more than 1billion. If c1=0.6 then multiplier=1 / (1  0.6) = 2.5 therefore output increases by 2.5 x 1billion which = 2.5billion 
Demand & Production as Functions of Income  Demand as a function of income: Z = ( c0 + I + G  c1T) + c1Y EQ output = Y = Z, b/c only at that point Production=Demand Y Intercept = Autonomous Spending Slope = c1 = propensity to consume ZZ = relation between demand and income Production line is 45 degrees b/c production and income are equal 
Changes in Demand  An Increase in demand leads to an increase in production and a corresponding increase in income, increased income leads to further increase in demand, which leads to further increase in production ETC. 
Econometrics  The set of statistical methods used in economics. 
Dynamics  Formally describing adjustments (of something like output) over time. 
Private Saving (S)  Savings by consumers. Is equal to their disposable income minus consumption: S = Yd  C therefore S is equal to Income minus taxes minus consumption: S = Y  T  C = Y  T  c0  c1 ( Y  T ) 
Public Saving  Public saving is equal to Taxes (T) minus government spending (G) Public Saving = T  G If T < G, budget deficit If T > G, budget surplus 
IS relation  Stands for "Investment equals Saving" I = S + ( T  G) S: Private saving (T  G): public saving 
The Two Equivalent Ways of Stating EQ in the Goods market  Production = Demand Investment = Saving b/c once consumers choose how much to consume, they have automatically decided how much to save (and vice versa) 
Propensity to Save  How much of an additional unit of income people save. Since S = Y  T  C, S must also equal = Y  T  c0  c1(Y  T) rearranged: S = c0 + (1  c1) (Y  T) Propensity to Save = ( 1  c1 ) 
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Composition of GDP  (The Percentages are for USA in 2010)
 
Consumption (C)  Goods and services purchased by consumers. C = c0 + c1 Yd Consumption = theoretical consumption at 0 income + (propensity to consume x Disposable Income) c0 is y intercept c1 is slope Yd is Disposable income (Income  Taxes or Y  T)  
Investment (I)  The sum of residential and nonresidential investment. I = nonresidential + residential investment I = S + ( T  G ) I = c0 + ( 1  c1 ) ( Y  T ) + ( T  G ) S: private saving T: taxes G: government spending  
Government Spending (G)  Purchases of goods and services by federal, state, and local governments. Does NOT include government transfers like medicare, interest on debt, or social security.  
Trade Balance or Net Exports  The difference between exports (X) and imports (IM). If exports exceeds imports, country has a trade surplus If imports exceeds exports, country has a trade deficit Trade Balance = Exports  Imports NE = X  IM  
Inventory Investment  What is produced in a certain country is naturally also sold eventually, but some of the goods produced in a given year may be sold in a later year rather than in the year they were produced. Inventory Investment = Production  Sales  
Total Demand for Goods (Z) (Equation)  Z = C + I + G + X  IM Expanded: Z = c0 + c1(Y  T) + I + G Z: Demand C: Consumption I: Investment G: Government Spending X: Exports IM: Imports  
Disposable Income (Yd)  Income that remains once consumers have received transfers from government and paid taxes. When disposable income goes up people buy more goods, when it goes down they buy less. Yd = Y  T Y: Income T: Taxes This is an identity equation  
Consumption Function (Equation)  WIKIPEDIA: The consumption function is a single mathematical function used to express consumer spending. C = c0 + c1 Yd considered a "Behavioral Equation" C = C(Yd) defined as this in book but not really important to know.  
Propensity to Consume (c1)  Gives the effect an additional dollar of disposable income has on consumption. Is c1 in the consumption equation: C = c0 + c1 Yd Usually positive and less than 1 b/c people are likely to consume some but not all of additional income received.  
Endogenous  Variables that depend on other variables in the model.  
Exogenous  Variables not explained within the model but are instead taken as given. Example: (Until Ch 5)Investment, Government Spending, and Taxes.  
Fiscal Policy  The choice of taxes and spending by the government WIKIPEDIA: Fiscal policy is the use of government revenue collection and expenditure (spending) to influence the economy.  
Equilibrium in the Goods Market  (assuming inventory investment is always equal to zero) In equilibrium: Production is equal to demand. Demand depends on income, which is equal to production. Requires that Production (Y) be equal to the demand for goods (Z). Y = Z, which is an equilibrium condition. and since "Z = c0 + c1 (Y  T) + I + G" is true the following must also be true: Y = c0 + c1 (Y  T) + I + G  
Production, Income, and Demand (Two Equations)  Y = c0 + c1Y  c1T + I + G Rewritten after moving c1Y to left, reorganizing the right, and dividing both sides by (1  c1): Y = 1 [ c0 + I + G  c1T ] 1  c1 The part in brackets is autonomous spending, the part outside is called the multiplier.  
Autonomous Spending  The part of demand for goods that does NOT depend on output. Autonomous Spending = [ c0 + I + G  c1T ] If T = G (Balanced Budget), and the propensity to consume (c1) is less than 1, then (G  c1T) is positive and so is Autonomous Spending. Only by a very large budget surplus ( T > G) could autonomous spending be negative.  
Balanced Budget  A country runs a balanced budget when Taxes equals Government Spending. T = G If T = G, and the propensity to consume (c1) is less than 1, then (G  c1T) is positive and so is Autonomous Spending.  
Multiplier  Multiplies autonomous spending. Is greater than 1 Multiplier = 1 (1  c1) Example: if c0 increases by 1billion, output increases by more than 1billion. If c1=0.6 then multiplier=1 / (1  0.6) = 2.5 therefore output increases by 2.5 x 1billion which = 2.5billion  
Demand & Production as Functions of Income  Demand as a function of income: Z = ( c0 + I + G  c1T) + c1Y EQ output = Y = Z, b/c only at that point Production=Demand Y Intercept = Autonomous Spending Slope = c1 = propensity to consume ZZ = relation between demand and income Production line is 45 degrees b/c production and income are equal  
Changes in Demand  An Increase in demand leads to an increase in production and a corresponding increase in income, increased income leads to further increase in demand, which leads to further increase in production ETC.  
Econometrics  The set of statistical methods used in economics.  
Dynamics  Formally describing adjustments (of something like output) over time.  
Private Saving (S)  Savings by consumers. Is equal to their disposable income minus consumption: S = Yd  C therefore S is equal to Income minus taxes minus consumption: S = Y  T  C = Y  T  c0  c1 ( Y  T )  
Public Saving  Public saving is equal to Taxes (T) minus government spending (G) Public Saving = T  G If T < G, budget deficit If T > G, budget surplus  
IS relation  Stands for "Investment equals Saving" I = S + ( T  G) S: Private saving (T  G): public saving  
The Two Equivalent Ways of Stating EQ in the Goods market  Production = Demand Investment = Saving b/c once consumers choose how much to consume, they have automatically decided how much to save (and vice versa)  
Propensity to Save  How much of an additional unit of income people save. Since S = Y  T  C, S must also equal = Y  T  c0  c1(Y  T) rearranged: S = c0 + (1  c1) (Y  T) Propensity to Save = ( 1  c1 ) 
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