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Some Limitations of GDP or GNI as measures of growth Some consumption is autonomous (= “independent” of DPI

• Ignores income distribution it may depend on other factors such as wealth or stock
• Ignores environmental degradation values.
• Does not include activities that do not go through the Marginal Propensity to Consume
formal markets sectors The proportion, or fraction, of any change in income
• Does not include "illegal" activities like drug trafficking, consumed is called the marginal propensity to consume
prostitution and etc. (MPC). The MPC is the ratio of a change in consumption to a
change in the income that caused the consumption change.
How much of every additional dollar in income is consumed?
MPC = change in consumption
change in income

The Consumption Function: the key to Keynes
• Consumption depends on the level of DISPOSABLE
disposable personal income = income - taxes = Y - T
• The consumption function proposed by Keynes is:
C = C0 + Cy ( Y - T)
C = C0 + Cy ( DPI)
C0 = Autonomous consumption
Cy = Marginal propensity to consume

651 Year Income Consumption MPC = shift>s-var>B MPC= 0. C = C0 + MPC ( DPI) Personal Disposable C0 = shift>s-var>A C0 = -4917375.700 2010 2009 483.855.509.898.013996423 2008 Source:www. Shift CLR>All 2. 2318500>M+ n=1 3. Mode > Reg>Lin 3.880 Yen how much will go to consumption? Deriving Consumption Function using Regression: 1.147. if Disposable income for 2012 will reach to 564.500 Source: www.400 1.800 2.700 2011 Japan’s Data in National Currency (Current Prices in Millions) • Using the given information above.oecd. Plug-in Data . 516898800.318.600 1.457.100 2.