MacroeconomicEquilibriumEquilibrium in the economy occurs when spending on output is equalto the value of output produced; that is:Aggregateexpenditure=GDPWe know from previous chapters that GDP is generally changing-growing-fromyear toyear;for simplicity,we will assumeinthischapter that the economy is not growing.@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 6 Macroeconomic Equilibrium Equilibrium in the economy occurs when spending on output is equal to the value of output produced; that is: Aggregate expenditure = GDP We know from previous chapters that GDP is generally changing— growing—from year to year; for simplicity, we will assume in this chapter that the economy is not growing
Adjustmentsto Macroeconomic EquilibriumJust like markets for a particular product may not be in equilibrium(quantity supplied may not equal quantity demanded at the currentprice), the economy may not be in equilibrium.Ifthen.and.aggregateexpenditureisthe economyisinequaltoGDPinventoriesareunchangedmacroeconomicequilibrium.GDP and employmentaggregateexpenditureislessthanGDPinventories risedecrease.GDP and employmentaggregate expenditure isgreater thanGDPinventoriesfallincrease.Table12.1The relationshipbetweenaggregateexpenditureandGDP@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 7 Adjustments to Macroeconomic Equilibrium Just like markets for a particular product may not be in equilibrium (quantity supplied may not equal quantity demanded at the current price), the economy may not be in equilibrium. The relationship between aggregate expenditure and GDP Table 12.1 If . . . then . . . and . . . aggregate expenditure is equal to GDP inventories are unchanged the economy is in macroeconomic equilibrium. aggregate expenditure is less than GDP inventories rise GDP and employment decrease. aggregate expenditure is greater than GDP inventories fall GDP and employment increase
MakingThe Effect of Unplanned Changes in InventoriestheConnectionFirmslikeApple don'twant tokeeptoo much inventory on hand. Notonly is it expensive, but technologyquickly becomes outdated.Appleforecastsits saleseachmonth,and plans to have adeguateinventory to cover sales.If sales arestronger than expected, it initiallycovers the extra sales through fallinginventories.The falling inventories signal toApple that it should hire moreworkersinordertoincreaseproduction.@2015Pearson Education,Inc
© 2015 Pearson Education, Inc. 8 Making the Connection The Effect of Unplanned Changes in Inventories Firms like Apple don’t want to keep too much inventory on hand. Not only is it expensive, but technology quickly becomes outdated. Apple forecasts its sales each month, and plans to have adequate inventory to cover sales. If sales are stronger than expected, it initially covers the extra sales through falling inventories. • The falling inventories signal to Apple that it should hire more workers in order to increase production
DeterminingtheLevelof AggregateExpenditureintheEconomy12.2LEARNINGOBJECTIVEDiscussthedeterminantsofthefourcomponentsof aggregateexpenditureanddefinemarginal propensitytoconsumeandmarginal propensityto save.@2015PearsonEducafion,lnc
LEARNING OBJECTIVE © 2015 Pearson Education, Inc. 9 Determining the Level of Aggregate Expenditure in the Economy 12.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save
Componentsof RealAggregateExpenditureThe table below shows the values of the components of expenditurein 2012, with prices in 2009 dollars.Real Expenditure(billionsof2009dollars)ExpenditureCategory$10,518Consumption2,436Plannedinvestment2,963Governmentpurchases-431Net exportsTable12.2Components ofrealaggregateexpenditure,2012Clearly consumption is the largest portion, with investment andgovernment expenditures being roughly similarly sized.Net exports were negative in 2012: the value of U.S. imports wasgreaterthan the value of U.S.exports.For the next several slides,we will examine each component in moredetail.10@2015PearsonEducafion.lnc
© 2015 Pearson Education, Inc. 10 Components of Real Aggregate Expenditure The table below shows the values of the components of expenditure in 2012, with prices in 2009 dollars. Components of real aggregate expenditure, 2012 Table 12.2 Expenditure Category Real Expenditure (billions of 2009 dollars) Consumption $10,518 Planned investment 2,436 Government purchases 2,963 Net exports −431 Clearly consumption is the largest portion, with investment and government expenditures being roughly similarly sized. Net exports were negative in 2012: the value of U.S. imports was greater than the value of U.S. exports. For the next several slides, we will examine each component in more detail