Consumption, Savings, and Investment

Consumption, Savings, and Investment

• Consumption involves the total value of goods and services that households purchase.
• The Consumption Function shows the relationship between consumption and economic variables influencing consumption decisions, expressed as C = Co + C1 Y.
• Co is a positive constant representing consumption when income (Y) is zero
• C1 signifies the marginal propensity to consume and is the slope of the consumption function line.
• The Average Propensity to Consume (APC) is a fraction of income spent on consumption, expressed as C/Y.
• Aggregate consumption level is affected by level of income, interest rate, level of employment, level of output, price level, exchange rate movements, and foreign trade.

Investment and Saving

• Saving constitutes the portion of income that is not spent on consumption.
• Investment is the total gross private domestic investment in new plants, equipment, non-residential and residential structures, and inventory accumulation during a period.
• Inventory accumulation reflects a change in the business inventory in a period.
• Saving is defined as income minus consumption, demonstrated as S = Y - C.
• Aggregate output (Y) = C + I, also Y = C + S, thus C + I = C + S, and therefore S = I.

Marginal Propensity and Multiplier

• Marginal Propensity to Consume (MPC) signifies the proportion of each added dollar of real disposable income that households allocate to real consumption.
• It is the slope of the consumption function.
• Aggregate output is shown as Y = C + I but Y = C + S as well, so C + I = C + S & S = I.
• The multiplier is the ratio reflecting the change in the equilibrium output level relative to a change in an autonomous variable.
• An autonomous variable is considered independent to change.
• The Investment multiplier is calculated as 1/MPS, that can be expressed as ΔY = ΔI × 1/MPS. This results in ΔY = ΔI / (1-MPC).

Simple Income Determination

• National income accountants framework: Y = C + Ir'
• 'C' stands for consumption
• Ir' means net realized investment.
• Realized investment incorporates net investment. It could be interntional or unintentional,
• With disposable income, Y = C + Sp.

Consumption Function

• Algebraically, given C = 0.75Y + 25 and I = 20, substituting gives Y = C + I leading to an equilibrium output of 180.
• Equilibrium point signifies intended investment intersects with saving schedule. Thus, equilibrium is $180b.

Application: Problem Solving & Example

• Aggregate consumption when income is zero is 5,000.
• Marginal propensity to consume is 0.75.
• Consumption expenditure at income P1 million is 750,000.
• The savings function is S = -5000 + 0.25Y.
• MPS is 0.25.
• In a closed economy without a government sector, with C = 700+0.6Ye, Ip = 300 + 0.2Ye – 40r with interest rate is fixed at 5%, the autonomous expenditure is 800 and the level of income is 4,000.
• Savings are 3100.
• If investment rises to 400, income will rise to 4500, with income will increase by 500.

Unemployment and Inflation

• Employment is the segment of the population currently employed.
• The labor force includes those who are employed or unemployed.
• Unemployment is a situation where people are actively seeking for work.
• The unemployment rate is the percentage of people unemployed.

Types of Unemployment

• Frictional: Results from typical economic shifts like workers seeking better jobs, companies replacing employees, changing consumer preferences, and technological advancements rendering some jobs obsolete.
• Structural: Results when individuals skills dont match the jobs available. It can arise from geographical and industrial shifts.
• Cyclical: Occurs during downturns. Economists generally view full employment as an economy without cyclical unemployment.

Classification and Causes of Unemployment

• Employment status is classified as family members with jobs, family members seeking for work, those on temporary layoffs, those who do not want paid employment, and those who cannot work due to illness.
• Quit jobs for better positions, discontent with pay, company retrenchment, co-terminus work status, unwillingness to work, incapacitation, over qualification, and lack of vacancies are causes of unemployment.

Effects and Solutions for Unemployment

• The results of widespread unemployment are poverty, human suffering, and reduced the Gross National Product (GNP).
• Measures for addressing unemployment include rural agricultural mobilization, promotion for industrialization, labor-focused policies, and improved education, resource allocation, political and infrastructural environments, and instiutional reforms.

Aspects of Inflation

• Inflation involves sustained rise in the price level.
• Hyperinflation involves rapid increases in the price level.
• Stagflation combines reduced economic growth and abnormally increased inflation.
• Deflation is a decrease in the general price level.

Identifying Inflation

• Consumer Price Index (CPI) tracks purchase prices made by typical households, relative to the base year.
• Implicit price deflator for GNP represents general price level relating to all GNP. The deflator is the ratio of nominal GNP to real GNP.

Inflation Causes

• Aggregate demand increases while maintaining supply.
• Aggregate supply sees a rise in costs.
• Expected inflation leads to increased aggregate supply.
• Contractions in certain commodities or shocks to supply.
• Increased costs of production (cost-push or supply-side inflation).
• Increase in the money supply.
• Structural limitations in adjusting to demand changes.
• Distortions in pricing system.

Inflation Effects

• Stagnant improvements in living standards.
• Unstable prices.
• Unemployment
• Altered supply output between firms and employees.
• Changes to price.
• Wage setting.
• Social and political consequences.
• Depreciation of currency.

Exchange Rates

• Nominal exchange rate is the rate at which units of foreign currency is exchanged for current dollar.
• The effect of inflation impacts it. The rate inflation in the Philippines is 10% per year, and 3% in the US.
• Real exchange rate represents nominal value adjusted for the different countries' price levels with chosen base year.

Controlling Inflation

• Monetarism utilizes deregulation to maximize individual roles and minimize macro roles.
• In monetarism dicretionary monetary and fiscal policies are replaced with balanced budget fiscal policy.
• Demand-management fine tuning is a strategy in which discretionary monetary and fiscal measures are used to stabilize the economy and promote full employment at low inflation rates. This depends on economic forecasts.
• Managing aggregate supply can be achieved through income which reduce the rise of wages and prices. It includes voluntary compliance, wage and price guidelines to mandatory controls.
• Indexing would adjust money payments and taxes to changes in the price level, eliminating monetary loss due to inflation.

Phillips Curve

• There is a negative relationship between inflation rate and unemployment.

Policy

• Fiscal policies: deals with levels of government purchases, taxes, and transfer payments.
• Monetary policies: are used to control money supply

Financial Institutions

• Financial System is composed of institutions for different procedures.
• Central bank works independently.
• Commercial banks can receive a loan.
• Non-banking function is fund manager.

Fiscal Policy

• National revenue means what resources the government has.
• Aspects of budgets includes maintenance and expenditures.

Business Cycles

• A business cycle constitutes recurring fluctuations of real GNP and aggregate output. The cycle consists of a peak (highest output, followed by recession, leading to a trough and subsequent recovery.
• Prosperity/Expansion phase includes employment, price, and profit. This is high level.
• Recession causes slowdowns in activities, the decline in income, and unemployment.
• A depression includes a drop in trade and rise in unemployment.
• Recovery are expansions and higher activity.

Potential Output/GNP

• Potential output is the maximum sustainable level of output while potential ratio is output to potential output.
• The "output gap" defined as the difference between actual and potential output.

Money and Banking

• Money functions a means of payment, store of value, and accounting unit.
• Money can come from barter, a medium of exchange emerges: commodity money, paper money and managed currency.
• Money is measured by the velocity of circulation used.
• Classifications for money consists of general purpose, and broad money.

Money Contn.

• The features of cash is that it has no intristic value.
• Chartalism is a monetary economics approach that states the initial demand for money helps pay taxes and goods.
• Commercial banks functions to receive deposits under Section 31. They can lend.
• Fiduciary functions means that resources are given to help others.
• The trustee executes the trust.

Trust Funds

• Trust funds serves as an effective source for larger communities.
• Trusts creates financial security.
• It can be used to provide benefits for loved ones.
• There are limitations, such as the age drawing or annual income to begin the full trust.