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What is GDP?
Gross Domestic Product (GDP)- is the nations expenditure on all the final goods and services produced during the year at market price. One way to calculate GDP is by adding all of Nations expenditures.
Nations Expenditures
Consumption Investment
Government Spending Net Exports
C + I + G + NX= GDP
This lecture will concentrate on Consumption
Consumption
Consumption is the nations expenditures on all final goods and services produced during the year at market prices. The total of everyones expenditures is called consumption. Consumption is designated by the letter C.
Consumption
C is the largest sector of GDP C is just over two-thirds of GDP The consumption functions states : As income rises, consumption (C) rises, but not as quickly Therefore, consumption varies with disposable income (DI)
Aggregate Consumption
Is the sum total of all expenditure on current consumption goods and services which are consumed currently eg. Food, clothing, fuel, rent etc. At low levels of income, almost entire income is spent on current consumption. As income level increases, some income is kept aside for saving.
The relation between aggregate consumption expenditure and aggregate income of household sector is known as Consumption Function. C = f (Y)
Saving Function
The relation between aggregate saving (S) and income (Y) is called as Saving Function. Saving function is given as : Y = C + S.
Two Ways To View ConsumptionIncome Relationship 1. As the ratio of total consumption to total disposable income. 2. As the relationship of changes in consumption to changes in disposable income.
30000
30000
30000
+
S 10000 1 APS = ------------ = ------------ = ------ = .25 DI 40000 4
1.00
Saving Rs.1,500
Saving
Consumption Rs.18,500
Rs.1,500
Saving
Consumption Rs.18,500
Rs.1,500
18500
37
Saving
Consumption Rs.18,500
Rs.1,500
18500
37
Saving
Consumption Rs.18,500
Rs.1,500
18500
37
+
S 1500 3 APS = ------------ = ------------ = ------ = .075 DI 20000 40
1.00
Rs.12,000
12
Rs.12,000
12
Rs.12,000
12
DI
Rs.10,000
10
1.00
MPC =
CHANGE CHANGE
in Consumption in Income
Year 1998
DI Rs.30000
C Rs.23000
S Rs.7000
1999
Rs.40000
Rs.31000
Rs.9000
1.0
Rs.6000?
45 Rs.1000 Rs.6000
Disposable Income
3 0 ,0 0
2 0 ,0 0
1 0 ,0 0
4 5 1 0 ,0 0
If Consumption rose at the same rate as Disposable Income . . . A graph of this function would be a 45 line
2 0 ,0 0
3 0 ,0 0
Saving = Rs.300
Disposable Income
Saving
Dissaving
Disposable Income
3000 1750
C
2,000
1,000
Consumption is the vertical distance between the bottom (horizontal) axis and the C line.
2,000
1,000
Saving is the vertical distance between the C line and the 45 degree line
2,000
1,000
Consumption is the vertical distance between the bottom (horizontal) axis and the C line.
2,000
1,000
Saving is the vertical distance between the C line and the 45 degree line
2,000
1,000
Consumption is the vertical distance between the bottom (horizontal) axis and the C line.
2,000
1,000
Saving is 0 at 1000 DI because there is NO distance between the C line and the 45 degree line.
2,000
1,000
Consumption is the vertical distance between the bottom (horizontal) axis and the C line.
2,000
1,000
2,000
3000 1750 1250 2000 1440 560 1000 1000 0 0 625 -625
1,000
Saving is the vertical distance between the C line and the 45 degree line. Saving is negative to the left of where the C line crosses the 45 degree line
Induced Consumption
Induced consumption (IC) is that part of consumption which varies with the level of disposable income As disposable income rises, induced consumption rises As disposable income fall, induced consumption falls
C = Autonomous C + Induced C
So Induced C = C Autonomous C IC = C - AC
Rs.0
Disposable Income
2,000
3000 1750 1250 2000 1440 560 1000 1000 0 0 625 -625 IC = C - AC
1,000
45
IC = 625 - 625
1,000 2,000 3,000 Disposable income ($)
DI = 0 What is IC?
IC = 0
2,000
3000 1750 1250 2000 1440 560 1000 1000 0 0 625 -625 IC = C - AC
1,000
45
IC = 1000 - 625
1,000 2,000 3,000 Disposable income ($)
IC = 375
2,000
3000 1750 1250 2000 1440 560 1000 1000 0 0 625 -625 IC = C - AC
1,000
45
IC = 1440 - 625
1,000 2,000 3,000 Disposable income ($)
IC = 815
2,000
3000 1750 1250 2000 1440 560 1000 1000 0 0 625 -625 IC = C - AC
1,000
45
IC = 1750 - 625
1,000 2,000 3,000 Disposable income ($)
IC = 1125
Consumption Function Y=C+S C = a + bY Where a = autonomous & b = MPC When Y = 0, C = a So, 0 = a + S i.e S = -a
a 0
Saving
45 o y
-a
Determinants of Consumption
1. Disposable Income The most important determinant of consumption 1. Credit Availability 2. Stock of Liquid Assets in the hands of consumers 3. Stock of Durable Goods 4. Keeping up with the neighbors.. 5. Consumer Expectations