Chapter 3
Total Expenditure &
GDP,Goods Market
0
10
20
30
40
90 91 92 93 94 95 96 97 98 99 00
Content
? 3.1 Concepts of Macroeconomic
Equilibrium
? 3.2 Consumption Function
? 3.3Simple Model and others
? 3.4 Multiplier
3.1 Concepts of Macroeconomic
Equilibrium
?Macroeconomic Equilibrium
?The total supply equals the total demand
Y a g g re g a te o u tpu t
the total sp e n d ing g ro ss inc o m e
??
?
Factors market
Goods&labor market
Family Firms
（ 1） supply factors of production
（ 2） payments
（ 3） buying products
（ 4） supply goods
3.1 Concepts of Macroeconomic
Equilibrium——two sections model
? leakage,family set aside part of the income
for saving,
? injection,firms get the investment
firms family
payments
Expenditure
on
consumption
Financial
market
savings Investme
nt
3.1 Concepts of Macroeconomic
Equilibrium
National income’s cycling model
From,Mankiw,Macroeconomics,5th Edition,P.36
3.1 Concepts of Macroeconomic
Equilibrium
? Macroeconomic variables from expenditure
view
?Consumption
?Investment
?Government Expenditure
?Net Export
NXGICY ????
3.1 Concepts of Macroeconomic
Equilibrium——three sections economy
Firms Family
Financial
market
government
3.1 Concepts of Macroeconomic
Equilibrium——four sections economy
3.1 Concepts of Macroeconomic
Equilibrium
Y
AE AE
Y 100 100
income=100
expenditure
=100
100 IU<0
IU>0
3.2 Consumption Function
?Factors on the behavior of consumer
?Income
?Price
?Rate
?Ration of income
?Preference
?Age of consumer
?Weather
?Customs
3.2 Consumption Function
? Keynes’ consumption function
)(YCC ?
bYaC ??
A family’s consuming list
Yin Bocheng’s,Western Economics”（ 3rd edition） page299
（ 1） （ 2） （ 3） （ 4）
Income Consumption MPC APC
1.01
1.00
0.99
0.97
0.94
0.92
0.89
0.89
0.85
0.75
0.64
0.59
0.53
9110
10000
10850
11600
12240
12830
13360
9000
10000
11000
12000
13000
14000
15000
A
B
C
D
E
F
G
Consumption curve
Y 0
1
2
3
C
6 8 10 12 14
4
5
6
7
C=C(Y)
45。
income equal
consumption
45?
Linear consumption curve
Y 0
1
2
3
C
6 8 10 12 14
4
5
6
7
C=a+bY
45。
income equals consumption
45?
3.2 Consumption Function
?Keynes’ consumption function
?Average Propensity to Consume,APC
?Marginal Propensity to Consume,MPC
Y
CA P C ?
dY
dC
Y
CM P C ?
?
??
3.2 Saving Function
?Keynes’ saving function
?Income increases,saving increases
accordingly
)(YSS ?
YbaS )1( ????
A family’s saving list
（ 1） （ 2） （ 3） （ 4）
Income Saving MPS APS 0.11
0.15
0.25
0.36
0.41
0.47
0.01
0.00
0.01
0.03
0.06
0.08
0.11
?110
0
150
400
760
1170
1640
?9000
10000
11000
12000
13000
14000
15000
A
B
C
D
E
F
G
Saving Curve
Y
0
-1
S
6 8 10 12 14
1
2
3
4
S=S(Y)
Linear Saving Curve
Y
0
-1
S
6 8 10 12 14
1
2
3
4
S=-a+(1-b)Y
3.2 Saving Function
?Keynes’ Saving Function
?Average Propensity to Save,APS
?Marginal Propensity to Save,MPS
Y
SAPS ?
dY
dS
Y
SM P S ?
?
??
3.2 Saving Function
?Keynes’ consumption function & saving
function
?The relation between APC&APS
?The relation between MPC&MPS
1?? A P SA P C
1?? M P SM P C
Consumption & saving curve
from,Yinbocheng,Simplified western economics” (Third
edition),page305
Y
0
-1
S
10 12 14
1
2
3
4
S=-a+(1-b)Y
C=a+bY
3.2 Consumption Function
?Family’s consumption function & social
consumption function
?Ration of national income
?Tax policy
?The rate of firm’s profit
1978-1991the nation’s consumption & income
from,Yuanzhigang,Macroeconomics”（ second edition),P133
Year income consumption APC
（ a hundred million Yuan ） (a hundred million Yuan ）
1 9 7 8 1 5 4 4, 0 1 5 1 4, 4 0, 9 8
1 9 8 0 2 2 4 6, 6 2 0 7 7, 8 0, 9 2
1 9 8 5 4 6 7 4, 8 4 1 4 1, 8 0, 8 9
8 1 5 1, 5 0, 8 01990 1 0 1 7 6, 9
9 2 2 2, 0 0, 7 9 61991 1 1 5 9 0,1
?The determination of income-two sections
?formula,
?Saving function, I=S
?45° line
)( 0Ia
b1
1
Y ?
?
?
3.3 A Simple Model and Others
Y=C+I
C=a+bY
I=I0
3.3 A Simple Model and Others
? The determination of income-three sections
?formula,
?Saving function, I+G=S+T
?45° line
Y=C+I+G
C=a+b(Y-T)
T=T0 +tY
I=I0,G=G0
)()1(1 1 000 bTGIatbY ??????
C+I+G
Y
(C+I)
o Y*
C
45o
C+I
3.3 A Simple Model and Others
?The determination of income-four sections
?Principle of,
?import,M=M0 +my
?export,X=X0
?formula,
?45° line
Y=C+I+G+(X-M)
C=a+b(Y-T)
T=T0 +tY
I=I0,G=G0,X=X0
M=M0 +mY
*
00000
)1(1
)()(
mtb
MXbTGiay
???
??????
3.3 A Simple Model and Others
C+I+G
Y
(C+I)
o Y*
C
45o
C+I
C+I+G+(X-M)
3.3 A Simple Model and Others
?multiplier
?The ratio of the change in an
endogenous variable to the change in a
exogenous variable (for example,the
ratio of the change in output to a change
in autonomous spending)
3.4 Multiplier
?Investment multiplier
3.4 Multiplier
Y=C+I+G
C=a+b(Y-T)
T=T0
I=I0,G=G0
)(1 1 000 bTGIabY ?????
')(
II YI
Yk ?
?
??
C+ △ I
Y
(C+I)
o Y’
C+I
45o
△ I
Y
△ Y 1??? IY
The effect of
multiplier
（ △I ） （ △A D ） （ △Y ） （ △C ）
F i r s t 1 0 0 1 0 0 1 0 0 △I 80
S e c o n d
80 80 △I * b 64
T h i r d 64 64 △I * b
2
51
… … … …
T o t a l
5 0 0 5 0 0 △Y 4 0 0
△ Y=△ I+△ Ib+△ Ib2+△ Ib3+△ Ib4+…..,
b=0.8=MPC
3.4 Multiplier
1 1 k G b??
b
bk
T ?
??
1
)1(1 tb
bk
T ??
??
1 k Tr bb??
3.4 Multiplier
? Multiplier of government
expenditure
? Multiplier of taxes（ fixed taxes）
? Multiplier of taxes （ tax to scale）
? Transferring expenditure multiplier
Y=C+I+G
C=a+b(Y-T)
T=T0
I=I0,G=G0
)(1 1 000 bTGIabY ?????
')(
GG YG
Yk ?
?
??
b
k G
?
?
1
1
Government expenditure multiplier
3.4 Multiplier
')(
TT YT
Yk ?
?
??
b
bk
T ?
??
1
T= T0
3.4 Multiplier
Y=C+I+G
C=a+b(Y-T)
T=T0
I=I0,G=G0
)(1 1 000 bTGIabY ?????
')(
TT YT
Yk ?
?
??
)1(1 tb
bk
T ??
??
T= T0 +tY
Y=C+I+G
C=a+b(-T)
T=T0 +tY
I=I0,G=G0
)(
)1(1
1
000 bTGIatbY ??????
3.4 Multiplier
Y=C+I+G
C=a+b(Y-T+Tr)
T=T0,Tr=Tr0
I=I0,G=G0
)(1 1 0000 b T rbTGIabY ??????
')(
TrTr YTr
Yk ?
?
??
b
bk
Tr ?? 1
Transferring expenditure multiplier
3.4 Multiplier
Balancing budget multiplier
TbbGbTkGkY TG ???????????? 11 1
TG ???
TGY ?????
1?
?
??
?
??
? T
Y
G
Yk
TG
3.4 Multiplier
?multiplier,Y?— >I?
?reasons,Y?— >C?— >production?—
investment?— >I?
?Formula of multiplier,
?Formula of investment&income,It= v( Yt- Yt-1 )
11 ?? ?
????
tt
t
tt YY
I
in c o m ein c o m e
Iv
3.4 Multiplier
Chapter 3
The End
0
10
20
30
40
90 91 92 93 94 95 96 97 98 99 00
Total Expenditure &
GDP,Goods Market
0
10
20
30
40
90 91 92 93 94 95 96 97 98 99 00
Content
? 3.1 Concepts of Macroeconomic
Equilibrium
? 3.2 Consumption Function
? 3.3Simple Model and others
? 3.4 Multiplier
3.1 Concepts of Macroeconomic
Equilibrium
?Macroeconomic Equilibrium
?The total supply equals the total demand
Y a g g re g a te o u tpu t
the total sp e n d ing g ro ss inc o m e
??
?
Factors market
Goods&labor market
Family Firms
（ 1） supply factors of production
（ 2） payments
（ 3） buying products
（ 4） supply goods
3.1 Concepts of Macroeconomic
Equilibrium——two sections model
? leakage,family set aside part of the income
for saving,
? injection,firms get the investment
firms family
payments
Expenditure
on
consumption
Financial
market
savings Investme
nt
3.1 Concepts of Macroeconomic
Equilibrium
National income’s cycling model
From,Mankiw,Macroeconomics,5th Edition,P.36
3.1 Concepts of Macroeconomic
Equilibrium
? Macroeconomic variables from expenditure
view
?Consumption
?Investment
?Government Expenditure
?Net Export
NXGICY ????
3.1 Concepts of Macroeconomic
Equilibrium——three sections economy
Firms Family
Financial
market
government
3.1 Concepts of Macroeconomic
Equilibrium——four sections economy
3.1 Concepts of Macroeconomic
Equilibrium
Y
AE AE
Y 100 100
income=100
expenditure
=100
100 IU<0
IU>0
3.2 Consumption Function
?Factors on the behavior of consumer
?Income
?Price
?Rate
?Ration of income
?Preference
?Age of consumer
?Weather
?Customs
3.2 Consumption Function
? Keynes’ consumption function
)(YCC ?
bYaC ??
A family’s consuming list
Yin Bocheng’s,Western Economics”（ 3rd edition） page299
（ 1） （ 2） （ 3） （ 4）
Income Consumption MPC APC
1.01
1.00
0.99
0.97
0.94
0.92
0.89
0.89
0.85
0.75
0.64
0.59
0.53
9110
10000
10850
11600
12240
12830
13360
9000
10000
11000
12000
13000
14000
15000
A
B
C
D
E
F
G
Consumption curve
Y 0
1
2
3
C
6 8 10 12 14
4
5
6
7
C=C(Y)
45。
income equal
consumption
45?
Linear consumption curve
Y 0
1
2
3
C
6 8 10 12 14
4
5
6
7
C=a+bY
45。
income equals consumption
45?
3.2 Consumption Function
?Keynes’ consumption function
?Average Propensity to Consume,APC
?Marginal Propensity to Consume,MPC
Y
CA P C ?
dY
dC
Y
CM P C ?
?
??
3.2 Saving Function
?Keynes’ saving function
?Income increases,saving increases
accordingly
)(YSS ?
YbaS )1( ????
A family’s saving list
（ 1） （ 2） （ 3） （ 4）
Income Saving MPS APS 0.11
0.15
0.25
0.36
0.41
0.47
0.01
0.00
0.01
0.03
0.06
0.08
0.11
?110
0
150
400
760
1170
1640
?9000
10000
11000
12000
13000
14000
15000
A
B
C
D
E
F
G
Saving Curve
Y
0
-1
S
6 8 10 12 14
1
2
3
4
S=S(Y)
Linear Saving Curve
Y
0
-1
S
6 8 10 12 14
1
2
3
4
S=-a+(1-b)Y
3.2 Saving Function
?Keynes’ Saving Function
?Average Propensity to Save,APS
?Marginal Propensity to Save,MPS
Y
SAPS ?
dY
dS
Y
SM P S ?
?
??
3.2 Saving Function
?Keynes’ consumption function & saving
function
?The relation between APC&APS
?The relation between MPC&MPS
1?? A P SA P C
1?? M P SM P C
Consumption & saving curve
from,Yinbocheng,Simplified western economics” (Third
edition),page305
Y
0
-1
S
10 12 14
1
2
3
4
S=-a+(1-b)Y
C=a+bY
3.2 Consumption Function
?Family’s consumption function & social
consumption function
?Ration of national income
?Tax policy
?The rate of firm’s profit
1978-1991the nation’s consumption & income
from,Yuanzhigang,Macroeconomics”（ second edition),P133
Year income consumption APC
（ a hundred million Yuan ） (a hundred million Yuan ）
1 9 7 8 1 5 4 4, 0 1 5 1 4, 4 0, 9 8
1 9 8 0 2 2 4 6, 6 2 0 7 7, 8 0, 9 2
1 9 8 5 4 6 7 4, 8 4 1 4 1, 8 0, 8 9
8 1 5 1, 5 0, 8 01990 1 0 1 7 6, 9
9 2 2 2, 0 0, 7 9 61991 1 1 5 9 0,1
?The determination of income-two sections
?formula,
?Saving function, I=S
?45° line
)( 0Ia
b1
1
Y ?
?
?
3.3 A Simple Model and Others
Y=C+I
C=a+bY
I=I0
3.3 A Simple Model and Others
? The determination of income-three sections
?formula,
?Saving function, I+G=S+T
?45° line
Y=C+I+G
C=a+b(Y-T)
T=T0 +tY
I=I0,G=G0
)()1(1 1 000 bTGIatbY ??????
C+I+G
Y
(C+I)
o Y*
C
45o
C+I
3.3 A Simple Model and Others
?The determination of income-four sections
?Principle of,
?import,M=M0 +my
?export,X=X0
?formula,
?45° line
Y=C+I+G+(X-M)
C=a+b(Y-T)
T=T0 +tY
I=I0,G=G0,X=X0
M=M0 +mY
*
00000
)1(1
)()(
mtb
MXbTGiay
???
??????
3.3 A Simple Model and Others
C+I+G
Y
(C+I)
o Y*
C
45o
C+I
C+I+G+(X-M)
3.3 A Simple Model and Others
?multiplier
?The ratio of the change in an
endogenous variable to the change in a
exogenous variable (for example,the
ratio of the change in output to a change
in autonomous spending)
3.4 Multiplier
?Investment multiplier
3.4 Multiplier
Y=C+I+G
C=a+b(Y-T)
T=T0
I=I0,G=G0
)(1 1 000 bTGIabY ?????
')(
II YI
Yk ?
?
??
C+ △ I
Y
(C+I)
o Y’
C+I
45o
△ I
Y
△ Y 1??? IY
The effect of
multiplier
（ △I ） （ △A D ） （ △Y ） （ △C ）
F i r s t 1 0 0 1 0 0 1 0 0 △I 80
S e c o n d
80 80 △I * b 64
T h i r d 64 64 △I * b
2
51
… … … …
T o t a l
5 0 0 5 0 0 △Y 4 0 0
△ Y=△ I+△ Ib+△ Ib2+△ Ib3+△ Ib4+…..,
b=0.8=MPC
3.4 Multiplier
1 1 k G b??
b
bk
T ?
??
1
)1(1 tb
bk
T ??
??
1 k Tr bb??
3.4 Multiplier
? Multiplier of government
expenditure
? Multiplier of taxes（ fixed taxes）
? Multiplier of taxes （ tax to scale）
? Transferring expenditure multiplier
Y=C+I+G
C=a+b(Y-T)
T=T0
I=I0,G=G0
)(1 1 000 bTGIabY ?????
')(
GG YG
Yk ?
?
??
b
k G
?
?
1
1
Government expenditure multiplier
3.4 Multiplier
')(
TT YT
Yk ?
?
??
b
bk
T ?
??
1
T= T0
3.4 Multiplier
Y=C+I+G
C=a+b(Y-T)
T=T0
I=I0,G=G0
)(1 1 000 bTGIabY ?????
')(
TT YT
Yk ?
?
??
)1(1 tb
bk
T ??
??
T= T0 +tY
Y=C+I+G
C=a+b(-T)
T=T0 +tY
I=I0,G=G0
)(
)1(1
1
000 bTGIatbY ??????
3.4 Multiplier
Y=C+I+G
C=a+b(Y-T+Tr)
T=T0,Tr=Tr0
I=I0,G=G0
)(1 1 0000 b T rbTGIabY ??????
')(
TrTr YTr
Yk ?
?
??
b
bk
Tr ?? 1
Transferring expenditure multiplier
3.4 Multiplier
Balancing budget multiplier
TbbGbTkGkY TG ???????????? 11 1
TG ???
TGY ?????
1?
?
??
?
??
? T
Y
G
Yk
TG
3.4 Multiplier
?multiplier,Y?— >I?
?reasons,Y?— >C?— >production?—
investment?— >I?
?Formula of multiplier,
?Formula of investment&income,It= v( Yt- Yt-1 )
11 ?? ?
????
tt
t
tt YY
I
in c o m ein c o m e
Iv
3.4 Multiplier
Chapter 3
The End
0
10
20
30
40
90 91 92 93 94 95 96 97 98 99 00
