Econ 202: Macroeconomics

Consumption, Saving and Investment

Goods Market Equilibrium

Alpay Filiztekin
Goods Market

Goods Market

The goods market is in equilibrium when the aggregate quantity

of goods supplied equals the aggregate quantity of goods
demanded:
Y = C d + I d + G.

The real interest rate is the key economic variable whose

adjustments help bring the quantities of goods supplied and
demanded into balance.

Thus, the analysis of saving and investment provides an

explanation of what determines interest rates.

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Goods Market

Goods Market

The goods market equilibrium condition, Y = C d + I d + G, is

different in an important way from the income–expenditure
identity for a closed economy, Y = C + I + G.

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Goods Market

Goods Market

The income–expenditure identity is a relationship between

actual income (output) and actual spending, which, by
definition, is always satisfied.

In contrast, the goods market equilibrium condition does not

always have to be satisfied.

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Goods Market

Goods Market

For example, firms may produce output faster than consumers

want to buy it so that undesired inventories pile up in firms’
warehouses.

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Goods Market

Goods Market

2016 2017
Gross domestic product at current prices by Gayrisafi yurtiçi hasıla, harcama yöntemiyle cari
expenditure approach (Millions TL) fiyatlarla (Milyon TL)
Value Share Value Share
Resident households and non-profit institutions Yerleşik hanehalkı ve hanehalkına hizmet eden kar
serving households final consumption expenditure 1,560,518 59.8 1,834,156 59.0 amacı olmayan kuruluşların nihai tüketim harcaması
Government final consumption expenditure 386,977 14.8 450,496 14.5 Devletin nihai tüketim harcamaları
Gross fixed capital formation 764,662 29.3 931,870 30.0 Gayrisafi sabit sermaye oluşumu
Change in stocks -28,363 -1.1 30,230 1.0 Stok değişmeleri
Exports of goods and services 572,965 22.0 770,553 24.8 Mal ve hizmet ihracatı
Imports of goods and services -648,233 -24.9 -910,768 -29.3 Mal ve hizmet ithalatı
Gross domestic product 2,608,526 100.0 3,106,537 100.0 Gayrisafi yurtiçi hasıla

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Goods Market

Goods Market

In this situation, the income–expenditure identity is still satisfied

(because the undesired additions to firms’ inventories are
counted as part of total spending), but the goods market would
not be in equilibrium because production exceeds desired
spending (which does not include the undesired increases in
inventories).
Although in principle the goods market equilibrium condition
need not always hold, strong forces act to bring the goods
market into equilibrium fairly quickly.

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Goods Market

Goods Market Equilibrium

Real interest rate, r

I(r)
S(r)

S=I Saving and

Investment

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Goods Market

Goods Market Equilibrium

A lower than equilibrium interest rate causes excess
invetsment, or shortage of funds.

Real interest rate, r I(r)

S(r)

r’

S=I Saving and

Investment
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Goods Market

Goods Market Equilibrium

Shifts of the saving curve due to a change in

• current output,
• expected future output,
• wealth,
• government purchases,
• taxes (unless Ricardian equivalence holds, in which case
tax changes have no effect)

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Goods Market

Goods Market Equilibrium

An example: Temporary increase in government purchases
shifts S left.

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Goods Market

Goods Market Equilibrium

Shifts of the investment curve due to a change in

• the effective tax rate, or
• expected future marginal productivity of capital.

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Goods Market

Goods Market Equilibrium

An example: An investment that raises future MPK .

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