gdp in banking 1

7/31/2019 Gdp in Banking 1

1/21

AGGREGATE DEMAND AND AGGREGATE SUPPLY

Session-4


2/21

AGGREGATE DEMAND

Defined:

o Amounts of Real Output

o Buyers Collectively Desire

o At Each Possible Price Level

Is the total level of demand for desired goods and services (at any time by all

groups within a national economy) that makes up the gross domestic

product (GDP).

It is a sum of consumption expenditure, investment expenditure,

government expenditure and net exports.

Other things equal, the amount consumers are willing to buy at a given price

level

Total demand for goods and services for a given price level


3/21

COMPONENTSOF AGGREGATE DEMAND

Consumption Demand (Consumption of goods and services by the private

sector- C )

Investment Demand (Investment by the private sector-I )

Government expenditure (C and I by Government - G)

Net Exports ( C and I by external sector (X) minus Imports (M)

Y = C+ I + G + XM

Aggregate Demand = Actual GDP

It is the aggregate spending by the private sector, Govt. sector and net

external sector on consumption and investment goods and services in the

economy


4/21

Aggregate Demand thus made of

o Private Sector spending

o Government sector spending

o External sector spending

This spending happens on

o Consumption of Goods and Services

o Investment in Goods and Services


5/21

DETERMINANTS OF AGGREGATE DEMAND

Change in Consumer Spending

o Consumer Wealth

o Consumer Expectationso Consumer Indebtedness

o Taxes

Change in Investment Spending

o Real Interest Rates

o Expected Returns

Expected Future Business Conditions

Technology

Degree of Excess Capacity

Business Taxes

Government Spending

Net Export Spending

o National Income Abroad

o Exchange Rates


6/21


7/21


8/21

MARGINAL PROPENSITYTO CONSUME (MPC)

Change in consumption expenditure in response to change in disposable

income

DISPOSABLE INCOME:

Divided into

o Consumption

o Savings


9/21

AGGREGATE CONSUMPTION EXPENDITURE

Desire to have a smooth consumption throughout our lifetime

Lifetime consumption path depends on lifetime income

o Income we receive from our work

o Income we expect to receive from our wealth

Distinction between Permanent and Transitory Income


10/21

People try to maintain highest smooth consumption path they can get

Derived from peoples expectations about permanent lifetime income both

from work and wealth

Current and past income from wealth and work play an important role in

peoples expectations about lifetime income.


11/21

COMPONENTSOFCONSUMPTION

Non-durable goods likes of food, drink, cloth, lighting, heating,

entertainment, etc.( Consumable goods )

Durable goods likes of furniture, appliances, cars, scooters, air-conditioners,

jewellery, etc

Services all non-durable consisting of hair cut, laundry, transport, banking,

insurance, health, education, legal and other services


12/21

DETERMINANTSOFCONSUMPTION

Income

Wealth

Relative income

Interest rate

Credit availability

Consumers expectations Income/wealth distribution


13/21

FLUCTUATIONSIN CONSUMPTIONDEMAND

Due to

Changes in real disposable income

Changes in personal tax rates

Changes in Interest rates

Erosion of wealth due to unexpected happenings.


14/21

INVESTMENT DEMAND

Investment means expenditure of funds on building new and fresh capital

goods. Aggregate Investment Expenditure is for purchase of new assets which will

help in production of future goods and services.

o Purchase new machinery

o Expenditure on setting up of new plant

Investment for the economy means spending on

physical capital, not financial capital(Equity and Debts)


15/21

CAPITAL STOCK

Rupee value of new plants, capital equipment, machinery etc. at a

given point of time.

Investment is the change in capital stock over a period of time

Investment is a flow while capital is a stock


16/21

IMPORTANCEOFINVESTMENTDEMAND

Investment expenditure has a dual role

Like consumption expenditure, it creates new demand, leading to anincrease in the Agg. Demand

Investments adds to the productive capacity, thereby enhancing the Agg.

Supply

Subject to wider fluctuations and hence more volatile than consumption

demand.

Affects production capacity and thus the long term growth potential of

the economy.

Investments positively affects both AD and AS


17/21

COMPONENTSOF INVESTMENTS

Fixed non-residential(business) investments

Fixed Residential Investments


18/21

DETERMINANTSOF AGGREGATE INVESTMENT EXPENDITURE

Outputdesired net investment is governed

positively by the change in expected output

Interest rate more investments so long as return

from the investment exceeds cost

Wage rateinvestment depends on the wage rate

Tax laws

Financing constraints

Technology

Business confidence/stock market behaviour

Government/other factors


19/21


20/21


21/21

An economy can have different forms of savings of which household

financial savings generally constitute the largest share in aggregatedomestic savings.

Other forms of savings comprise physical savings by households, savings

by the private corporate sector and the public sector and foreign savings

Sometimes when savings exceed investment there would be deficiency of

aggregate demand and general unemployment.

Gap between S and I could be filled by government intervention either

directly by increasing government expenditure or indirectly by actions

influencing the supply of money

gdp in banking 1

Documents