How can we illustrate the dynamics of Keynesian Economics within an aggregate supply – aggregate demand (ASAD) framework? The following post explains the Keynesian dynamics that we discussed in a previous post using an AS-AD model.
Continue reading Keynesian Economics in an AS-AD modelCategory Archives: Macroeconomics
Aggregate Demand
What is aggregate demand? Aggregate demand refers to total expenditure in an economy in a certain period. That is, aggregate demand comprises everything that is spend in an economy in one period. One can split aggregate demand into different subcomponents. Formally, one can describe aggregate demand (Y) as
Y = C + I + G + NX
As one can see from the equation above, aggregate demand (Y) is equal consumption (C) plus investment (I) plus government spending (G) plus net exports (NX), i.e. how much we are selling abroad to other countries on net.
According to Keynesian theory, aggregate demand determines the amount of available expenditure in an economy. Now, why should one care about available expenditure? Well, in Keynesian economics, available expenditure determines the amount of means available in an economy in order to sustain labor hires in a given period. That is, in the Keynesian model, the available expenditures is what keeps people at work. Boldly speaking, the amount of expenditure defines the amount of available money to pay the wages of workers. This concept is particularly important during a recession. Assume for instance, that a shock hits the economy and aggregate demand decreases. This implies that demand for firms’ products drops and firms will sell less products and earn less money. Hence, at the end of the month firms have less money available to pay their employees. Meaning that firms will be forced to lay off some workers and unemployment increases. Hence, in a Keynesian setting, a drop in aggregate demand implies a decrease in the means available in an economy, leading to less jobs and higher unemployment.
Continue reading Aggregate DemandKeynesian Economics
Keynesian Economics is a central doctrine in economics that forms the foundation of modern macroeconomic thinking. It was established by John Maynard Keynes during the 1930s. In 1936, the British economist published his book “The General Theory of Employment, Interest and Money” that forms the basis of the Keynesian school. The following series of blog posts will introduce Keynesian Economics, provide useful insights and discuss the most important concepts. The first post is dedicated to aggregate demand, the key concept of Keynesian Economics. The following post explains the dynamics of Keynesian Economics in an aggregate supply/ aggregate demand (AS-AD) model. The third post discusses the remedies of Keynesian Economics in the light of a recession. Finally, the last post elaborates some drawbacks of Keynesianism.
Continue reading Keynesian EconomicsWhat is Total Factor Productivity (TFP)?
In growth theory, changes in output (GDP) are explained through changes of production factors, i.e. changes in labour or capital. Economists consider the residual, i.e. the part of changes in output that one cannot explain with changes of production factors, as total factor productivity (TFP) or technological change. In contrast to labour productivity, that relates output only to labour, total factor productivity states how efficiently an economy uses all its production factors. Continue reading What is Total Factor Productivity (TFP)?
What is Labour Productivity?
Newspapers, and in particular economists frequently talk about labour productivity. Especially when commenting the current state of the economy, labour productivity is of central concern. This post will explain the concept of labour productivity and highlight its importance in the context of business cycle analysis. Continue reading What is Labour Productivity?
Review: The Conscience of a Liberal
In The Conscience of a Liberal, Paul Krugman provides a compelling explanation for the recent increase of inequality in the United States. In contrast to the widely believed idea that is was globalization that caused the increase in inequality, he argues that Continue reading Review: The Conscience of a Liberal
Review: Hillbilly Elegy
Hillbilly Elegy is a tale of social decay. In an absorbing and fascinating manner, J.D. Vance outlines different episodes of his life that go along with the social decline of the white middle-class in the Midwest. In an impressive fashion, Continue reading Review: Hillbilly Elegy
Difference between liberal and progressive
In the past, I had a lot of difficulties to understand the difference between liberal and progressive. In fact, I was convinced, and actively used the word progressive as a synonym for the word liberal. Continue reading Difference between liberal and progressive
The Gini Coefficient
The Gini Coefficient is often used an indicator of inequality in a country. Additionally, one can also use the Gini Coefficient as an indicator of economic development. The Gini Coefficient is based on the Lorenz Curve and measures the degree of income or wealth inequality in an economy. The coefficient is bound between zero and one. This means that the coefficient can take on values between zero and one. A Gini Coefficient of one states complete inequality. That is, one single person receives all the income or holds all the wealth of the economy, while all others receive or own nothing. A Gini Coefficient of zero implies perfect equality. That is, all individuals obtain the same income. See the discussion of the Lorenz Curve for a clear illustration of the concept. Continue reading The Gini Coefficient
How to compute the Lorenz Curve
In contrast to our previous post, that is the post that summarized the Lorenz Curve in general terms, this post details how to construct the Lorenz Curve and provides a hypothetical example in R.
Economic Theory Blog 