Macroeconomics notes weeks 3&4

Macroeconomics week 3 + 4
Module code: EC108
Lecturer: Natalie Chen




Topics
● The goods market
● Financial markets


The goods market
When economists think about economic activity they focus on production, income and
demand
- Changes in demand for goods leads to changes in production
- Changes in production lead to changes in income
- Changes in income lead to changes in the demand for goods

The composition of GDP
● Consumption (C) - goods and services purchased by consumers
● Investment (I) or fixed investment - the sum of nonresidential investment and
residential investment
● Government spending (G) - purchases of goods + services by the federal, state and
local governments, excluding government transfers
● Exports (X), Imports (IM)
● Net exports/trade balance - X - IM
○ Exports > imports = trade surplus
○ Imports > exports = trade deficit
● Inventory investment - difference between production and sales (leftovers)

The demand for goods
- Consumption is a function of disposable income (YD)
C = C(YD)
- C(YD) is called the consumption function
- This is a behavioural equation that captured the behaviour of consumers
- Assume that the consumption function is a linear relation with 2 parameters, c0 and
c1
- Changes in c0 reflect changes in consumption for a given level of disposable income
- The keynesian consumption function

, Graphing the demand for goods:
- Consumption increases with disposable income but less than one for one
- A lower value of c0 will shift the curve downwards