The Goods Market

…………..The Goods Market……..……..
1. **Consumption (C)**: This is the money spent by regular people like you and me on things we buy
every day, such as food, clothes, and services like haircuts and movies.
2. **Investment (I)**: This is when businesses and individuals spend money on things that help them
make more money in the future. It includes buying machines for factories (nonresidential investment) and
homes (residential investment).
3. **Government Spending (G)**: This is the money that the government spends on things like schools,
roads, and services like police and healthcare. But it doesn't include things like giving people money
(government transfers) or paying off loans (interest payments on the public debt).
4. **Imports (IM)**: These are things that we buy from other countries, like electronics, cars, or clothing.
5. **Exports (X)**: These are things we sell to other countries, like American-made cars or software.
Now, let's talk about net exports:
- **Net Exports (=X-IM)**: This is like a balance sheet for trade. If we sell more to other countries (X is
greater than IM), we have a trade surplus, which is good for our economy because we're making money
from other countries. But if we buy more from other countries (IM is greater than X), we have a trade
deficit, which means we're spending more money overseas than we're making from selling our stuff
abroad.
So, when we look at these components together, we get the total Gross Domestic Product (GDP), which is
a measure of all the goods and services produced in a country. It's like adding up all the money spent by
regular people, businesses, and the government, while also considering the balance of trade with other
countries.
The concepts of The Demand for Goods
This is all about how much people, businesses, and the government wants to buy and spend on goods
produced within their own country.
**The total demand (Z) for domestic goods**
This means the total amount of stuff (goods) that people, businesses, and the government in a country
want to buy and use.
Now, let's look at the assumptions:
**i) There exists only one good;**
In this simplified scenario, we're pretending that there's only one type of product or good available in the
economy. In reality, there are many different types of goods, like cars, phones, and food, but for this
example, we're considering just one kind to make things easier.
**ii) Firms are willing to supply any amount of the good at a given price (P);**
This means that companies are ready to make and sell as much of this one product as people want, as long
as they can sell it at a certain price. If the price is right, they'll produce as much as needed.
**iii) The economy is closed (X=IM=0) so that Z=C+I+G.**
In this closed economy, we're ignoring international trade. So, we're not buying or selling goods to or
from other countries. Instead, the total demand for domestic goods (Z) is simply the sum of:
- What regular people spend (C)

- What businesses invest (I)
- What the government spends (G)
So, Z represents all the spending and demand for goods within the country's own borders without
considering trade with other nations.
The concept of consumption and the formula provided:
**Consumption (C)**
This is the money that people spend on things like food, clothes, and other items.
**Consumption depends on disposable income (YD) - (YoY-T).**
This means that how much people spend is linked to how much money they have left after paying taxes.
If you earn money (YoY) and subtract the taxes you have to pay (T), you get your disposable income
(YD), which is the money you have available to spend after taxes.
**Notice that tax is lump-sum. Tax can take other forms too: e.g., tax as a function of income.**
This means that taxes can be a fixed amount that you have to pay, no matter how much you earn (lump-
sum). But taxes can also be a percentage of your income (tax as a function of income), where you pay
more if you earn more.
**In a functional form, C = C(YD) and > 0.**
This is saying that we can express how much people spend (C) as a function of their disposable income
(YD), and this relationship is positive. In simple terms, when people have more money (YD), they tend to
spend more.
**One example of such a consumption function is C = Co + C₁YD = Co + C₁(Y-T), where C₁ is the
marginal propensity to consume (MPC), 0 < C₁ < 1; and Co is exogenous or independent consumption
spending, 0 < Co.**
Here's a formula to help understand how people spend money:
- C is the amount people spend.
- YD is their disposable income (how much money they have after taxes).
- Co is a baseline amount of money they spend regardless of their income.
- C₁ is the marginal propensity to consume, which is how much of their extra income they spend. It's a
number between 0 and 1, meaning they don't spend all of it; they save some.
So, this formula shows that people have a base level of spending (Co), and they also spend some of the
extra money they have (C₁) when their income goes up, considering the taxes they pay (Y - T).

The Goods Market

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The Goods Market

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…………..The Goods Market……..……..

Now, let's talk about net exports:

The total demand (Z) for domestic goods

Now, let's look at the assumptions:

i) There exists only one good;

iii) The economy is closed (X=IM=0) so that Z=C+I+G.

- What regular people spend (C)

- What the government spends (G)

The concept of consumption and the formula provided:

Consumption depends on disposable income (YD) - (YoY-T).

In a functional form, C = C(YD) and > 0.

Here's a formula to help understand how people spend money:

- C is the amount people spend.

- Co is a baseline amount of money they spend regardless of their income.

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