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chapter 3: the goods market (demand for goods Z = c + i + g (c = c0 + c1yd…
chapter 3: the goods market
the composition of GDP
components
I = investment
G = government
X = exports
c = consumption
IM = imports
(X - IM) = net exports
GDP=C+I+G+(X-IM)
the difference between production vs sales = inventory investment
demand for goods Z = c + i + g
c = c0 + c1yd = consumption
c1 has to be less than 1
changes in c0 reflect an increase in consumption for a given level of disposable income.
yd = Y - T
exogenous variables = variables that depend on other variables in the model .
exogenous variables = variables not explained within the model but are instead taken as given.
investment
exogenous
government spending
exogenous
assumptions
firms produce the same goods
firms are willing to supply any amount of the good at any price level P
determining equilibrium output
Z (demand for goods) = Y (production)
types of equations
identities (equation defining a possible outcome.
behavioral equations (consumption function)
equilibrium conditions ( Z = Y)
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