Estimating the Multiplier Effects of Tourism Expenditures on a Local Economy through a Regional
Aggregate Expenditures: The Multiplier, Net Exports, and Government CHAPTER TEN.
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Transcript of Aggregate Expenditures: The Multiplier, Net Exports, and Government CHAPTER TEN.
Aggregate Aggregate Expenditures:Expenditures:
The Multiplier, The Multiplier, Net Exports, Net Exports,
and and GovernmentGovernment
CHAPTER TEN
CHANGES IN EQUILIBRIUM GDPAND THE MULTIPLIER
CHANGES IN EQUILIBRIUM GDPAND THE MULTIPLIER
Pri
va
te s
pe
nd
ing
(b
illi
on
s o
f d
oll
ars
)S
av
ing
an
d i
nv
es
tme
nt
(bil
lio
ns
of
do
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rs)
o
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Real domestic product, GDP (billions of dollars)
510510
490490
470470
450450
430430
Real domestic product, GDP (billions of dollars)
2020Ig0
430 450 470 490 510430 450 470 490 510
430 450 470 490 510430 450 470 490 510
Equilibrium GDPEquilibrium GDPat at IIg0g0 level of investment level of investment
S
(C + Ig ) 0
CHANGES IN EQUILIBRIUM GDPAND THE MULTIPLIER
CHANGES IN EQUILIBRIUM GDPAND THE MULTIPLIER
Pri
va
te s
pe
nd
ing
(b
illi
on
s o
f d
oll
ars
)S
av
ing
an
d i
nv
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tme
nt
(bil
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ns
of
do
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o
o45
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Real domestic product, GDP (billions of dollars)
510510
490490
470470
450450
430430
Real domestic product, GDP (billions of dollars)
2020Ig0
430 450 470 490 510430 450 470 490 510
430 450 470 490 510430 450 470 490 510
Equilibrium GDPEquilibrium GDPat at IIg0g0 level of investment level of investment
S
(C + Ig ) 0
If I If I gg
increases...increases...
CHANGES IN EQUILIBRIUM GDPAND THE MULTIPLIER
CHANGES IN EQUILIBRIUM GDPAND THE MULTIPLIER
Pri
va
te s
pe
nd
ing
(b
illi
on
s o
f d
oll
ars
)S
av
ing
an
d i
nv
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tme
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(bil
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of
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(C + Ig ) 1
Real domestic product, GDP (billions of dollars)
510510
490490
470470
450450
430430
Real domestic product, GDP (billions of dollars)
2020Ig0
Ig1
430 450 470 490 510430 450 470 490 510
430 450 470 490 510430 450 470 490 510
Equilibrium GDPEquilibrium GDPat at IIg1g1 level of investment level of investment
S
(C + Ig ) 0
Pri
vate
sp
end
ing
(b
illio
ns
of
do
llars
)S
avin
g a
nd
inve
stm
ent
(bill
ion
s o
f d
olla
rs)
o
o45
o
Real domestic product, GDP (billions of dollars)
510510
490490
470470
450450
430430
Real domestic product, GDP (billions of dollars)
2020 Ig0
430 450 470 490 510430 450 470 490 510
430 450 470 490 510430 450 470 490 510
Equilibrium GDPEquilibrium GDPat at IIg0g0 level of investment level of investment
(C + Ig ) 0
S
CHANGES IN EQUILIBRIUM GDPAND THE MULTIPLIER
CHANGES IN EQUILIBRIUM GDPAND THE MULTIPLIER
If I If I gg
decreases...decreases...
Pri
vate
sp
end
ing
(b
illio
ns
of
do
llars
)S
avin
g a
nd
inve
stm
ent
(bill
ion
s o
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rs)
o
o45
o
(C + Ig ) 2
Real domestic product, GDP (billions of dollars)
510510
490490
470470
450450
430430
Real domestic product, GDP (billions of dollars)
2020 Ig0
Ig2
430 450 470 490 510430 450 470 490 510
430 450 470 490 510430 450 470 490 510
Equilibrium GDPEquilibrium GDPat at IIg2g2 level of investment level of investment
(C + Ig ) 0
S
CHANGES IN EQUILIBRIUM GDPAND THE MULTIPLIER
CHANGES IN EQUILIBRIUM GDPAND THE MULTIPLIER
THE MULTIPLIER EFFECTTHE MULTIPLIER EFFECTTHE MULTIPLIER EFFECTTHE MULTIPLIER EFFECT
Multiplier Multiplier ==change in real GDPchange in real GDP
initial change in spendinginitial change in spending
OROR
Change in GDPChange in GDP == Multiplier Multiplier xx initial changeinitial changein spendingin spending
Rationale - $ spent in the economy is earned by others as income.Others go and spend part of their income and so on, and so on…
Change in GDPChange in GDP == Multiplier Multiplier xx initial changeinitial changein spendingin spending
and the marginal propensities....and the marginal propensities....
Inverse relationship betweenInverse relationship betweenMultiplier & MPSMultiplier & MPS
SimplifiedSimplifiedMultiplier Multiplier
== OROR11
MPSMPS11
1 - MPC1 - MPC
THE MULTIPLIER EFFECTTHE MULTIPLIER EFFECTTHE MULTIPLIER EFFECTTHE MULTIPLIER EFFECT
How much will a dollar spent, not saved have an impact on the economy?
The Multiplier EffectThe Multiplier Effect• The multiplier helps us
understand that spending changes are magnified when applied to the economy.
• This is especially important for fiscal policy considerations!
• The complex multiplier current being applied by the President is 2.
• Remember the simple multiplier only takes into effect the leakage of savings.
• Complex takes into effect taxes and imports.
INTERNATIONAL TRADE INTERNATIONAL TRADE EQUILIBRIUM OUTPUTEQUILIBRIUM OUTPUT
INTERNATIONAL TRADE INTERNATIONAL TRADE EQUILIBRIUM OUTPUTEQUILIBRIUM OUTPUT
NET EXPORTSNET EXPORTSNET EXPORTSNET EXPORTS
INTERNATIONAL TRADE INTERNATIONAL TRADE EQUILIBRIUM OUTPUTEQUILIBRIUM OUTPUT
INTERNATIONAL TRADE INTERNATIONAL TRADE EQUILIBRIUM OUTPUTEQUILIBRIUM OUTPUT
NET EXPORTSNET EXPORTSNET EXPORTSNET EXPORTS
PositivePositive if exports > imports if exports > imports
INTERNATIONAL TRADE INTERNATIONAL TRADE EQUILIBRIUM OUTPUTEQUILIBRIUM OUTPUT
INTERNATIONAL TRADE INTERNATIONAL TRADE EQUILIBRIUM OUTPUTEQUILIBRIUM OUTPUT
NET EXPORTSNET EXPORTSNET EXPORTSNET EXPORTS
PositivePositive if exports > imports if exports > imports
NegativeNegative if imports > exports if imports > exports
INTERNATIONAL TRADE INTERNATIONAL TRADE EQUILIBRIUM OUTPUTEQUILIBRIUM OUTPUT
INTERNATIONAL TRADE INTERNATIONAL TRADE EQUILIBRIUM OUTPUTEQUILIBRIUM OUTPUT
NET EXPORTSNET EXPORTSNET EXPORTSNET EXPORTSPositivePositive if exports > imports if exports > imports
NegativeNegative if imports > exports if imports > exports
Now C + I + (x-m) orNow C + I + (x-m) orC + I + XC + I + X n
g
g
INTERNATIONAL TRADE EQUILIBRIUM OUTPUTINTERNATIONAL TRADE EQUILIBRIUM OUTPUTINTERNATIONAL TRADE EQUILIBRIUM OUTPUTINTERNATIONAL TRADE EQUILIBRIUM OUTPUT
Pri
vate
sp
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of
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)S
avin
g a
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Real domestic product, GDP (billions of dollars)
510510
490490
470470
450450
430430
Real domestic product, GDP (billions of dollars)
+5+5
-5-5
430 450 470 490 510430 450 470 490 510
430 450 470 490 510430 450 470 490 510
C + Ig
Equilibrium GDP atEquilibrium GDP atnet export = 0 net export = 0 levellevel
INTERNATIONAL TRADE EQUILIBRIUM OUTPUTINTERNATIONAL TRADE EQUILIBRIUM OUTPUTINTERNATIONAL TRADE EQUILIBRIUM OUTPUTINTERNATIONAL TRADE EQUILIBRIUM OUTPUT
Pri
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)S
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Real domestic product, GDP (billions of dollars)
510510
490490
470470
450450
430430
Real domestic product, GDP (billions of dollars)
+5+5
-5-5
430 450 470 490 510430 450 470 490 510
430 450 470 490 510430 450 470 490 510
C + Ig
Equilibrium GDP atEquilibrium GDP atnet export = 0 net export = 0 levellevel
ToToillustrateillustrate
positivepositive net netexportsexports
INTERNATIONAL TRADE EQUILIBRIUM OUTPUTINTERNATIONAL TRADE EQUILIBRIUM OUTPUTINTERNATIONAL TRADE EQUILIBRIUM OUTPUTINTERNATIONAL TRADE EQUILIBRIUM OUTPUT
Pri
vate
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ing
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)S
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Real domestic product, GDP (billions of dollars)
510510
490490
470470
450450
430430
Real domestic product, GDP (billions of dollars)
+5+5
-5-5
430 450 470 490 510430 450 470 490 510
430 450 470 490 510430 450 470 490 510
C + Ig
Equilibrium GDP atEquilibrium GDP atpositive net export positive net export
level Xlevel Xn1n1
Xn1
C + Ig + Xn1
INTERNATIONAL TRADE EQUILIBRIUM OUTPUTINTERNATIONAL TRADE EQUILIBRIUM OUTPUTINTERNATIONAL TRADE EQUILIBRIUM OUTPUTINTERNATIONAL TRADE EQUILIBRIUM OUTPUT
Pri
vate
sp
end
ing
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)S
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nd
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(bill
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rs)
o
o45
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Real domestic product, GDP (billions of dollars)
510510
490490
470470
450450
430430
Real domestic product, GDP (billions of dollars)
+5+5
-5-5
430 450 470 490 510430 450 470 490 510
430 450 470 490 510430 450 470 490 510
C + Ig
Equilibrium GDP atEquilibrium GDP atnet export = 0 net export = 0 levellevel
ToToillustrateillustrate
negativenegative net netexportsexports
INTERNATIONAL TRADE EQUILIBRIUM OUTPUTINTERNATIONAL TRADE EQUILIBRIUM OUTPUTINTERNATIONAL TRADE EQUILIBRIUM OUTPUTINTERNATIONAL TRADE EQUILIBRIUM OUTPUT
Pri
vate
sp
end
ing
(b
illio
ns
of
do
llars
)S
avin
g a
nd
inve
stm
ent
(bill
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Real domestic product, GDP (billions of dollars)
510510
490490
470470
450450
430430
Real domestic product, GDP (billions of dollars)
+5+5
-5-5
430 450 470 490 510430 450 470 490 510
430 450 470 490 510430 450 470 490 510
C + Ig
Xn2
Equilibrium GDP atEquilibrium GDP atnegative net exportnegative net export
level Xlevel Xn2n2
C + Ig + Xn2
International Economic International Economic Linkages…These shift Linkages…These shift the net export curve.the net export curve.
International Economic International Economic Linkages…These shift Linkages…These shift the net export curve.the net export curve.
• Prosperity AbroadProsperity Abroad• Prosperity AbroadProsperity AbroadThe more prosperous our trading partners are we will likely seean increase in exports.
International Economic International Economic Linkages...Linkages...International Economic International Economic Linkages...Linkages...
• Prosperity AbroadProsperity Abroad
• TariffsTariffs
• Prosperity AbroadProsperity Abroad
• TariffsTariffsTariffs imposed by other countries on our products will reduce ourExports.
International Economic International Economic Linkages...Linkages...International Economic International Economic Linkages...Linkages...
• Prosperity AbroadProsperity Abroad•TariffsTariffs• Exchange RatesExchange Rates
• Prosperity AbroadProsperity Abroad•TariffsTariffs• Exchange RatesExchange Rates
Depreciation of the $ will cause exports to increase. We alsoWon’t buy as many imports as they will be more expensive.
ADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTOR
o45
o
Real domestic product, GDP (billions of dollars)
5050
3030
00
470 510 550470 510 550
C + Ig + Xn
Real domestic product, GDP (billions of dollars)470 510 550470 510 550
C
Ig + X
S+M
C +
I g +
Xn +
G(b
illi
on
s o
f d
oll
ars)
Sa+
M+
T, I
g +
X +
G(b
illio
ns
of
do
llars
)
Show the effect ofShow the effect ofgovernment spendinggovernment spending
ADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTOR
o45
o
Real domestic product, GDP (billions of dollars)
5050
3030
00
470 510 550470 510 550
C + Ig + Xn + G
Equilibrium GDPEquilibrium GDPafterafter $20 billion $20 billion
government spendinggovernment spending
C + Ig + Xn
Real domestic product, GDP (billions of dollars)470 510 550470 510 550
C
Ig + XIg + X + G
S+M
Governmentspending
$20 billion
Government spending $20 billion
C +
I g +
Xn +
G(b
illi
on
s o
f d
oll
ars)
Sa+
M+
T, I
g +
X +
G(b
illio
ns
of
do
llars
)
C +
I g +
Xn +
G(b
illi
on
s o
f d
oll
ars)
Sa+
M+
T, I
g +
X +
G(b
illio
ns
of
do
llars
)
o45
o
Real domestic product, GDP (billions of dollars)
5050
3030
00
490 550490 550
C + Ig + Xn + G
Impact of taxes onImpact of taxes onequilibrium GDPequilibrium GDP
Real domestic product, GDP (billions of dollars)
Ig + XIg + X + G
S+M
$15 billiondecrease in
consumption
490 550490 550
$20 billion increasein taxes
ADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTOR
C +
I g +
Xn +
G(b
illi
on
s o
f d
oll
ars)
Sa+
M+
T, I
g +
X +
G(b
illio
ns
of
do
llars
)
o45
o
Real domestic product, GDP (billions of dollars)
5050
3030
00
490 550490 550
C + Ig + Xn + G
Impact of taxes onImpact of taxes onequilibrium GDPequilibrium GDP
Real domestic product, GDP (billions of dollars)
Ig + XIg + X + G
S+M
$15 billiondecrease in
consumption
490 550490 550
$20 billion increasein taxes
ADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTOR
Toillustrate a
$20 billion taxincrease
Toillustrate a
$20 billion taxincrease
Lump-Sum TaxesLump-Sum Taxes
C +
I g +
Xn +
G(b
illi
on
s o
f d
oll
ars)
Sa+
M+
T, I
g +
X +
G(b
illio
ns
of
do
llars
)
o45
o
Real domestic product, GDP (billions of dollars)
5050
3030
00
490 550490 550
C + Ig + Xn + G
Impact of taxes onImpact of taxes onequilibrium GDPequilibrium GDP
Real domestic product, GDP (billions of dollars)
Ig + XIg + X + G
S+M
$15 billiondecrease in
consumption
$5 billion decreasein saving
490 550490 550
Sa+MSa+M+T
Ca + Ig + Xn + G
$20 billion increasein taxes
ADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTOR
C +
I g +
Xn +
G(b
illi
on
s o
f d
oll
ars)
Sa+
M+
T, I
g +
X +
G(b
illio
ns
of
do
llars
)
o45
o
Real domestic product, GDP (billions of dollars)
5050
3030
00
490 550490 550
C + Ig + Xn + G
Impact of taxes onImpact of taxes onequilibrium GDPequilibrium GDP
Real domestic product, GDP (billions of dollars)
Ig + XIg + X + G
S+M
$15 billiondecrease in
consumption
$5 billion decreasein saving
490 550490 550
Sa+MSa+M+T
Ca + Ig + Xn + G
$20 billion increasein taxes
ADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTOR
BalancedBalancedBudgetBudget
MultiplierMultiplier
Real GDP (billions of dollars)
o45
o
490 510 530490 510 530
(C + Ig + Xn + G)0
Full EmploymentPri
vate
an
d g
ove
rnm
ent
spen
din
g (
bil
lio
ns
of
do
llar
s)
Recessionary gap - Whenaggregate expendituresare inadequate to bringabout full employment
Recessionary gap - Whenaggregate expendituresare inadequate to bringabout full employment
ADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTOR
Real GDP (billions of dollars)
(C + Ig + Xn + G)1
o45
o
490 510 530490 510 530
(C + Ig + Xn + G)0
Full Employment
} RecessionaryRecessionaryGap = $5 billion Gap = $5 billion
Pri
vate
an
d g
ove
rnm
ent
spen
din
g (
bil
lio
ns
of
do
llar
s)
Recessionary gap - Whenaggregate expendituresare inadequate to bringabout full employment
Recessionary gap - Whenaggregate expendituresare inadequate to bringabout full employment
ADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTOR
Real GDP (billions of dollars)
o45
o
490 510 530490 510 530
Full EmploymentPri
vate
an
d g
ove
rnm
ent
spen
din
g (
bil
lio
ns
of
do
llar
s)
ADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORInflationary gap - Whenaggregate expendituresare greater than the full
employment level causingdemand-pull inflation
Inflationary gap - Whenaggregate expendituresare greater than the full
employment level causingdemand-pull inflation
(C + Ig + Xn + G)0
Real GDP (billions of dollars)
o45
o
490 510 530490 510 530
(C + Ig + Xn + G)0
Full EmploymentPri
vate
an
d g
ove
rnm
ent
spen
din
g (
bil
lio
ns
of
do
llar
s)
ADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTORADDING THE PUBLIC SECTOR
(C + Ig + Xn + G)1
{ InflationaryGap = $5 billion
InflationaryGap = $5 billion
Inflationary gap - Whenaggregate expendituresare greater than the full
employment level causingdemand-pull inflation
Inflationary gap - Whenaggregate expendituresare greater than the full
employment level causingdemand-pull inflation
Historical Applications...Historical Applications...• Great DepressionGreat Depression
Historical Applications...Historical Applications...• Great DepressionGreat Depression• Overcapacity & Business Overcapacity & Business
IndebtednessIndebtedness
Historical Applications...Historical Applications...• Great DepressionGreat Depression• Overcapacity & Business Overcapacity & Business
IndebtednessIndebtedness• Decline in Residential Decline in Residential
ConstructionConstruction
Historical Applications...Historical Applications...• Great DepressionGreat Depression• Overcapacity & Business Overcapacity & Business
IndebtednessIndebtedness• Decline in Residential Decline in Residential
ConstructionConstruction• Stock Market CrashStock Market Crash
Historical Applications...Historical Applications...• Great DepressionGreat Depression• Overcapacity & Business Overcapacity & Business
IndebtednessIndebtedness• Decline in Residential Decline in Residential
ConstructionConstruction• Stock Market CrashStock Market Crash• Shrinking Money SupplyShrinking Money Supply
Historical Applications...Historical Applications...• Great DepressionGreat Depression• Overcapacity & Business Overcapacity & Business
IndebtednessIndebtedness• Decline in Residential Decline in Residential
ConstructionConstruction• Stock Market CrashStock Market Crash• Shrinking Money SupplyShrinking Money Supply
• Vietnam War InflationVietnam War Inflation
•Recessionary gapRecessionary gap•Inflationary gapInflationary gap•Multipliers: Simple, Multipliers: Simple, Tax, and balanced-Tax, and balanced-budget multiplierbudget multiplier
•Lump-sum taxLump-sum tax
•Recessionary gapRecessionary gap•Inflationary gapInflationary gap•Multipliers: Simple, Multipliers: Simple, Tax, and balanced-Tax, and balanced-budget multiplierbudget multiplier
•Lump-sum taxLump-sum tax
Coming Next:Coming Next:Coming Next:Coming Next:
AGGREGATE DEMANDAGGREGATE DEMANDANDAND
AGGREGATE SUPPLYAGGREGATE SUPPLY
AGGREGATE DEMANDAGGREGATE DEMANDANDAND
AGGREGATE SUPPLYAGGREGATE SUPPLYCHAPTER 11CHAPTER 11CHAPTER 11CHAPTER 11