Note9

❖ 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.