Changes in Equilibrium GDP and the Multiplier The

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 Previous Slide End Show 10 - 1 Next Slide 10 CHAPTER Aggregate Expenditures The Multiplier, Net Exports, and Government Copyright Mc. Graw-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 Previous Slide End Show 10 - 2 Next Slide Private spending (billions of dollars) Changes in Equilibrium GDP and the Multiplier 510 Equilibrium GDP at Ig 1 Equilibrium level of investment at Ig 0 level of investment (C + Ig ) 1 (C + Ig ) 0 490 Increases in the level of C + Ig 470 450 430 o 45 o 430 450 470 490 510 Real domestic product, GDP (billions of dollars) Copyright Mc. Graw-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 Previous Slide End Show 10 - 3 Next Slide Private spending (billions of dollars) Changes in Equilibrium GDP and the Multiplier 510 Equilibrium GDP at Ig 2 level of investment (C + Ig ) 0 (C + Ig ) 2 490 470 Decreases in the level of C + Ig 450 430 o 45 o 430 450 470 490 510 Real domestic product, GDP (billions of dollars) Copyright Mc. Graw-Hill/Irwin, 2002

THE MULTIPLIER EFFECT Changes in Equilibrium GDP and the Multiplier The Multiplier Effect Multiplier 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 Previous Slide End Show 10 - 4 Next Slide Change in GDP Change in Real GDP = Initial Change in Spending = Multiplier x initial change in spending The Multiplier Effect and the Marginal Propensities Inverse relationship between Multiplier & MPS Copyright Mc. Graw-Hill/Irwin, 2002

THE MULTIPLIER EFFECT 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 Change in GDP = = Multiplier x End Show 10 - 5 Next Slide initial change in spending MPC and the Multiplier MPC Multiplier . 9 10 . 8 5 . 75 Previous Slide 1 1 or 1 - MPC MPS 4 . 67. 5 3 2 Copyright Mc. Graw-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 Previous Slide End Show 10 - 6 Next Slide INTERNATIONAL TRADE AND EQUILIBRIUM OUTPUT Net Exports Positive if exports > impor Negative if imports > expo Net Exports and Aggregate Expenditures C + Ig + ( X – M ) Xn = ( X – M ) C + Ig + Xn Copyright Mc. Graw-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 Previous Slide End Show 10 - 7 INTERNATIONAL TRADE AND EQUILIBRIUM OUTPUT Net Export Schedule Net Exports and Equilibrium GDP • Positive Net Exports • Negative Net Exports Next Slide Graphically… Copyright Mc. Graw-Hill/Irwin, 2002

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 Private spending (billions of dollars) Changes in Equilibrium GDP and the Multiplier INTERNATIONAL TRADE AND EQUILIBRIUM OUTPUT 510 Net Exports, Xn (billions of dollars) End Show 10 - 8 Next Slide C + Ig + Xn 1 C + Ig 490 470 450 430 o Key Terms Previous Slide Aggregate Expenditures with Positive Net Exports 45 o 430 450 470 490 510 Real domestic product, GDP (billions of dollars) +5 0 430 -5 Copyright Mc. Graw-Hill/Irwin, 2002 450 470 490 510 Real GDP

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 Private spending (billions of dollars) Changes in Equilibrium GDP and the Multiplier INTERNATIONAL TRADE AND EQUILIBRIUM OUTPUT 510 Net Exports, Xn (billions of dollars) End Show 10 - 9 Next Slide C + Ig + Xn 2 490 470 450 430 o Key Terms Previous Slide Aggregate Expenditures with Negative Net Exports 45 o 430 450 470 490 510 Real domestic product, GDP (billions of dollars) +5 0 430 -5 Copyright Mc. Graw-Hill/Irwin, 2002 450 470 490 510 Real GDP

Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output INTERNATIONAL ECONOMIC LINKAGES • Prosperity Abroad International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model • Tariffs Limitations of the Model Key Terms Previous Slide End Show 10 - 10 Next Slide • Exchange Rates Copyright Mc. Graw-Hill/Irwin, 2002

GLOBAL PERSPECTIVE NET EXPORTS OF GOODS, 1999 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect Negative Net Exports International Trade and Equilibrium Output Positive Net Exports Canada International Economic Linkages France Adding the Public Sector Germany Full-Employment GDP Italy Applications of the Model Japan Limitations of the Model Key Terms United Kingdom United States Previous Slide End Show 10 - 11 Next Slide -400 -140 -100 -60 -20 0 20 60 Billions of Dollars Copyright Mc. Graw-Hill/Irwin, 2002 Source: World Trade Organization 100

ADDING THE PUBLIC SECTOR 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 Previous Slide End Show 10 - 12 Next Slide 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 Copyright Mc. Graw-Hill/Irwin, 2002

ADDING THE PUBLIC SECTOR 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 Previous Slide End Show 10 - 13 Next Slide Aggregate Expenditures (billions of dollars) Changes in Equilibrium GDP and the Multiplier Government Purchases and Equilibrium GDP C + Ig + Xn + G Government Spending of $20 Billion o 45 C + Ig + Xn C o 470 550 Real domestic product, GDP (billions of dollars) Copyright Mc. Graw-Hill/Irwin, 2002

ADDING THE PUBLIC SECTOR 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 Previous Slide End Show 10 - 14 Next Slide Lump-Sum Tax and Equilibrium GDP Aggregate Expenditures (billions of dollars) Changes in Equilibrium GDP and the Multiplier $15 Billion Decrease in Consumption from a $20 Billion Increase in Taxes o 45 C + Ig + Xn + G Ca + I g + X n + G o 490 550 Real domestic product, GDP (billions of dollars) Copyright Mc. Graw-Hill/Irwin, 2002

ADDING THE PUBLIC SECTOR 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 Previous Slide End Show 10 - 15 Next Slide Injections Leakages Unplanned Changes in Inventories Balanced Budget Multiplier Recessionary Gap Inflationary Gap Copyright Mc. Graw-Hill/Irwin, 2002

FULL-EMPLOYMENT GDP 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 Previous Slide End Show 10 - 16 Next Slide Recessionary Gap Aggregate Expenditures (billions of dollars) Changes in Equilibrium GDP and the Multiplier AE 0 AE 1 530 510 Recessionary Gap = $5 Billion 490 Full Employment o 45 o 490 510 530 Real domestic product, GDP (billions of dollars) Copyright Mc. Graw-Hill/Irwin, 2002

FULL-EMPLOYMENT GDP 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 Previous Slide End Show 10 - 17 Next Slide Inflationary Gap Aggregate Expenditures (billions of dollars) Changes in Equilibrium GDP and the Multiplier 530 AE 2 AE 0 Inflationary Gap = $5 Billion 510 490 Full Employment o 45 o 490 510 530 Real domestic product, GDP (billions of dollars) Copyright Mc. Graw-Hill/Irwin, 2002

APPLICATIONS OF THE MODEL 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 Previous Slide End Show 10 - 18 • Great Depression • Vietnam War Inflation • The End of the Japanese Growth “Miracle” Next Slide Copyright Mc. Graw-Hill/Irwin, 2002

LIMITATIONS OF THE MODEL 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 Previous Slide End Show 10 - 19 Next Slide • Does Not Show Price. Level Changes • Ignores Premature Demand-Pull Inflation • Bars Real GDP Beyond Full-Employment • Does Not Deal With Cost -Push Inflation Copyright Mc. Graw-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 Previous Slide End Show 10 - 20 Next Slide Copyright Mc. Graw-Hill/Irwin, 2002

multiplier net exports lump-sum tax balanced-budget multiplier recessionary gap inflationary gap Copyright Mc. Graw-Hill/Irwin, 2002 BACK END

Changes in Equilibrium GDP and the Multiplier Coming Next: 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 AGGREGATE DEMAND AGGREGATE SUPPLY Key Terms Previous Slide End Show 10 - 22 Next Slide CHAPTER 11 Copyright Mc. Graw-Hill/Irwin, 2002