ECO209Y1 Chapter Notes - Chapter 3: Disposable And Discretionary Income, Shortage, Consumption Function

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26 Oct 2017
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Chapter 3: aggregate expenditure model consumption and investment: models are simplified representations of real world. If assumption is at odds with reality, or relevant variable left out of model, then model is distortion of reality. Assumption 1: value of gdp equals value of national income: implies gdp=ndi, implies gdp = gnp. Indirect taxes, capital consumption allowance (depreciation) zero. Net payment to foreign factors of production zero. Assumption 2: economic resources are fixed: assume only capital, labor, technology. Size of capital stock, size of labor force, state of technology are constant: implies absence of growth, changes in output due to changes in degree of factor-utilization. Assumption 3: price level is fixed: for this to be reasonable, consider economy with high unemployment and significant excess capacity. What is aggregate expenditure: value of all economic agents" planned/desired expenditure on final goods and services produced in domestic economy, ae = c + i + g + nx. Different from gdp, which measures actual expenditure.

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