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, Saving and
Investment
Dr. Shylajan, C.S
Topics of Discussion
Aggregate Demand
Y= C + I + G + NX
Aggregate Demand
Where,
stands for actual GDP
or output and
C + I + G + NX
stands
for Aggregate Demand for
Four sector model
Aggregate Demand
has four components
Total spending on
1. Consumption goods and service (C)
by
the private sector
2. Investment goods and services (I)
by
the private sector
4.
In US economy - growth of
consumption demand (C )
Hence we have to stimulate C
part of AD
Consumption Demand
Y = C + I + G + NX
Aggregate expenditure on current
consumption of final goods and service
Examples?
Food, Fuel, clothing, education, medical
expenses etc
A Consumption
Function
for
a Household
The relationship
between consumption
Consumption
Function
Marginal Propensity to
Consume (MPC)
The change in
consumption expenditure
in response to a change
in disposable income.
Consumption
Function
Y=
C+S
=a+bY
=Y-C
Consumption
Function
C
=a+bY
0<b<1
Consumption
Function
C = 50 + 0.75 Y
If disposable income increases by Rs 100 and
Rs. 75 of this increase is spent on current
consumption, the MPC is 0.75
Balance is saved.
1-
Consumption
Function
Saving Function
MPS = 1 - MPC
Keynesian Theory
Consumption is a function of
current income
Short run theory
Mpc is between 0 and 1
MPC declines as income increases
Permanent Income
Theory-Milton
Friedman
Not current income but permanent
income
PI is all the income anticipated in the
long run (labor income +Capital
Income).
The level of income that households
would receive when temporary or
transient influences such as the
whether, a short business cycle or a
windfall gain or loss- are removed.
INVESTMENT FUNCTION
Topics of Discussion
Investment
Function and AD
What is Investment Demand?
What determines Aggregate
Investment Spending?
The Investment Demand Curve
Shifts in Investment Demand
Curve
Investment Demand
Y = C + I + G + NX
Second major component
of Aggregate Demand
Investment Demand
Investment spending
Examples:
Purchase
of new machinery,
expenditure on setting up a new
power plant etc
Capital goods which are used in
the production process
Additions to inventory
Investment Demand
Factors and
(taxes, interest rates etc)
Sentiment
Driven Factors
(Expectations)
I = f ( Y, r)
The Investment
Demand Curve
Shifts in the
Investment Demand
Curve
Factors other than interest rate also
affect investment spending.
Current Investment
slow down in India
Reasons?
Economic
growth?
Business Confidence?
Summary