Consumer spending + Business gross fixed investment + Change in inventories + Government spending + Government gross fixed investment + Exports - Imports + Statistical discrepancy GDP based on Income Approach Gross domestic income (GDI) + Net domestic income + Consumption of fixed capital (CFC) + Statistical discrepancy Gross domestic income (GDI) = Compensation of employees + Gross operating surplus + Gross mixed income + Taxes less subsidies on factors of production + Taxes less subsidies on products and imports GDP = C + I + G + (X - M) - Money saved does not flow into this equation, not part of GDP growth Personal income - Broad measure of all household income - Ability to make purchases - All income received by households whether earned or unearned Personal Disposable Income - All personal income minus personal taxes - It measures household purchasing power after all taxes have been paid - It represents the money available to spend on goods and services or to be saved Household Savings - Personal disposable income minus consumption expenditures, interest paid to businesses, and personal transfer payments Personal Income = Compensation of employees + Net mixed income from unincorporated businesses + Net property income Household disposable income (HDI) = Personal income - Net current transfers paid
Household net saving = Household disposable income - Household final consumption expenditures + Net change in pension entitlements Savings and Investments are inversely related - You can't save your money and invest it too - Investment is a form of spending Three ways to absorb savings: 1. Can go to Investment spending (I) 2. Can finance government deficits (G-T) 3. Can finance trade deficits (X-M) Savings Equation: - S = I + (G - T) + (X - M) - To focus on fiscal deficits: G - T = (S - I) - (X - M) Increasing fiscal deficits requires increased savings and decreased deficits by the private sector. Can also be financed with trade deficits Consumption spending is a function of disposable income (Y - T) Marginal propensity to consume and marginal propensity to save Aggregate Demand Shows the quantity of real output demanded at different price levels but two conditions must be satisfied - Aggregate income and planned expenditure must be balanced (IS curve) - Equilibrium in the money market (LM curve) IS-LM curve - A macro tool that illustrates the relationship between interest rates and asset prices - IS = Investment-Saving - LM = Liquidity-Money (also known as the Hicks-Hansen Model) - Used to model general equilibrium of price levels; how the market for goods interacts with the money market (loanable funds) Interpretations of IS-LM: 1. Explains the changes that occur in National Income when short-term price levels are fixed 2. Explains the causes of a shift in the aggregate demand curve.
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