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Gross Domestic Product
 Here in Chicago Board of Trade and Wall Street, 2 of the most important financial centers in the world. |
GDP
The four components of GDP- Consumption (C) depends on disposible income
- Investment (I) depends on the real interest rate
- Government purchases (G) set by policy makers
- Net Exports (NX)
Interest Rate (r)
The interest rate is the cost of borrowing and the return to lending in financial markets. At the equilibrium interest rate, the demand for goods and services equals the supply. The greater the interest rate:- the lower the level of investment.
- the lower the demand for goods and services.
- the fewer investment projects are profitable.
Money Demand Function
(M/P)d=L(i,Y)
For this demand function, we assume the demand for real money balances depends on both the interest rate and income.Money (M1)
- Currencies and deposits in checking accounts.
- As a store value is always dominated by other assets such as Savings accounts, Treasury Bills, certificates of deposit, etc.
National Saving (S)
S=(Y-T-C)+(T-G)
National Saving is the sum of private and public saving.- Private saving is disposible income minus consumption. (Y-T-C)
- Public Saving is government revenue minue government spending. (T-G)
According to Macroeconomics by Gregory Mankiw
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