Macroeconomics and Business

Forecasting (Eco 502) - 2

- Dr. Mirza Azizul Islam

Outlays and components of demand(Section 2.2)

 Total demand for domestic output consists of

 Consumption by households (C)
 Investment spending by business and households (I)
 Government purchases of goods and services (G) and
 Net export (NX)
Y = C + I + G + NX = GDP
 Consumption – proportion in Bangladesh and other countries
(see the following table)
 2010 2014

Cp+Cg+I Ip + Ig) +X—M Cp+Cg+I Ip + Ig) +X—M

Bangladesh 77+5+24+18-25 73+5+29+19-26

China 35+13+48+30-26 37+14+46+23-19

India 57+12+35+22-25 59+11+32+23-25

Outlays and components of demand(Sec :2.2)

 Government purchase – transfer payments are not counted as

part of GDP because these are not part of current production.
 Investment – defined as addition to physical stock of capital
e.g. housing construction, machinery, construction of
factories and offices, inventory buildup.
 Does not include bonds or stock purchase, nor expenditure
on education (human capital)
 Net exports = exports (foreigners purchase goods we
produce) – imports (we purchase goods foreigners produce)
Two sides of GDP
Expenditure approach/ Earning approach/ production side
Demand side

Consumption (C) + Gross Wages, salaries and other labour

private investment (I) + Govt. income + interest, rent and other
expenditure (G) + Net exports property income + profit, depreciation
(NX) + Indirect taxes

•The following simplifying assumptions are usually made

in economic analysis
o GDP = NDP i.e. depreciation ignored
Some important identities (section 2.3)
 Output denoted by Y
 Assume no Govt. and no foreign trade in which case
all output is sold either for consumption (C) or
investment (I) which are components of demand –
unsold output treated as accumulation of
investments i.e. part of investment.
 So, Y = C+I
Some important identities (section 2.3)
An alternative way is to look at allocation
of income, part will be spent on
consumption, part will be saved (S)
Y = C+S
Or I = S i.e. in a simple economy,
investment is identically equal to saving.
Reintroducing the Govt. & foreign trade

As already seen, Y = C + I + G + NX

The concept of disposable income

Yd = Y + TR – TA

Or Yd – TR + TA = Y
Reintroducing the Govt. & foreign trade

Where -

 Yd = Disposable Income

 TR = transfer including interest on government bonds

 TA = taxes paid

 Also Yd = C + S (Allocation of Income)

 Yd – TR +TA = Y = C + I + G + NX

 Or, C + S – TR + TA = C + I + G + NX

 (S – I) = (G + TR – TA) + NX
A hypothetical example
S=1000
I=950
(S-I)=50
G+TR-TA=150
NX= -100

(S – I) = (G + TR – TA) + NX

50 = 150+(-100)
Reintroducing the Govt. & foreign trade

The above equation shows an important

relationship among private sector savings
and investment on one side and govt.
budget deficit and net export on the other
side.