Slide 1

Basic Keynesian Model Keynesian Cross Diagram Slide 2 Measuring the macroeconomy Pg.2 GNPpm = GDP factor incomes from abroad + factor incomes of foreigners NetNPpm = GNPpm - Depreciation NNP at factor costs = Net National Product Net indirect taxes + Subsidies (NNP=net national product at factor costs) NI (National Income) = NNPcf Personal Dispousable Income (PDI = Family income = NI Direct taxes + Transfers - Profits + Undistributed profits Personal Disposable Income (PDI = Family income )= Consumption Spending + Savings Consumer price index: the CPI measures the price increase of a merket basket fo goods representative of the purchases of a typical household The Unemployment rate: The unemployed are people who want to work and are actively looking for jobs but have not yet found one. The unemployment rate is equal to the number of unemployed people divided by the total labor force. Slide 3 Macroeconomic model Pg.3 SectorsMarketsFunctions Endogenous variables Policies Households Firms Government Foreign Sector Goods and Services Financial wealth: Money. Bonds. Trabajo C, I, G, X,Q, T,S. L, M/P. Ls, Ld. Y (GDP) P (CPI) U (Unemployment) er (Exchange rates) r (Interest rates) Demand side Fiscal. Monetary. Trade and Exchange rates policies. Supply side: Incomes. Structural. Slide 4 Key concepts Pg.4 GDP composition The demand of goods and services The equilibrium Slide 5 Intended expenditure or aggregate demand components Pg.5 CCCCpriv + I + Cpub + G + Ipriv = Internal+ X+ Ipub + X = Final+ X - Q GDP mp Slide 6 The circular flow of economic activity Pg.6 INCOMES WAGES ((FLOW OF INCOMES) MONETARY FLOW REAL FLOW HOUSEHOLDS (CONSUMPTION) FIRMS (PRODUCTION ) EXPENDITURE (FLOW OF EXPENDITURE) MARKET GOODS & SERVICES MERCADO DE FACTORES DE PRODUCCION FACTORS GOODS AND SERVICES Demand varies, production Production varies, income varies Income varies, demand varies Slide 7 National income identity Pg.7 Production is equal to income. Then: This last equation states that savings should be sufficient for financing the investment spending, the budget deficit and the trade deficit. In other words, increases in budget or trade deficits unless accompanied by an equal increase in savings will lead to the crowding out of investment Slide 8 Short-run macroeconomic models Pg.8 Keynesian model (Endogenous variable: Income) Fixed prices Pure exchange economy. No money IS-LM Model (Endogenous variables: income-interest rate) Fixed prices Monetary economy Open economy without capital flows IS-LM with capital mobility (Mundell-Fleming) (Endogenous variables: Income-interest rates) Fixed prices Monetary economy Open economy with capital flows Aggregate supply and demand model (Endogenous variables: Prices- Income). AS-AD diagram Sticky prices Monetary economy Dynamic AS-AD model (endogenous variables: inflation rates and income) Slide 9 Keynesian model: assumptions Pg.9 Government sector: (0