ECON 295 Lecture 4: Econ chapter 21
3 Apr 2016
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The national accounts divide actual gdp into its components: Total desired expenditure is divided into the same categories: Ae = c + i + g + nx. Autonomous expenditures do not depend on the level of national income. Induced expenditures do depend on the level of national income. By simplifying the model we are better able to understand its structure and therefore how more complex versions of the model work. In the simplest theory, consumption is determined primarily by current disposable income. In more advanced theories, individuals are forward looking, and so consumption depends on more lifetime income. The marginal propensity to consume relates the change in desired consumption to the change in disposable income that brings it about. The mpc is the slope of the consumption function. In the previous diagram, the apc is the same at any level of income. Investment expenditure is the most volatile component of gdp:
