[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

12,000
10,000
BILLIONS OF 2000 DOLLARS
8,000
6,000
4,000
Real GDP
Real consumption
2,000
0
1960 1965 1970 1975 1980 1985 1990 1995 2000
Figure 30.3
CONSUMPTION AND GDP
Real consumption spending is the largest component of aggregate expenditures. It
moves closely with total real income in the economy.
SOURCE: Economic Report of the President (2004).
our concern is with the aggregate behavior of the economy, we are most interested
in the change in aggregate consumption as aggregate income changes. The aggregate
MPC can be thought of as an average, over the millions of households in the economy,
of all the individual marginal propensities to consume. The aggregate MPC is equal
to the slope of the aggregate consumption function.
The aggregate MPC conveys important information. Since consumption is a
large fraction of total aggregate expenditures, the upward slope of the aggregate
expenditures schedule shown in Figure 30.1 is closely related to the MPC. As aggregate
income rises, disposable income rises, and households increase their consumption
spending. If the MPC is high, indicating that changes in disposable income cause
large changes in consumption, then the aggregate expenditures schedule will be
steep. If households save a large fraction of any increase in income, then the MPC
will be small and the aggregate expenditures schedule will be flatter.
The Marginal Propensity to Save Individuals must either spend or save
each dollar of disposable income. The definition “disposable income = consumption
plus saving” tells us that if consumption rises by 90 cents when disposable income
rises by a dollar, saving must rise by 10 cents. The higher level of saving stemming
from an extra dollar of income is called the marginal propensity to save (MPS).
Since the extra dollar is either spent or saved, the marginal propensity to consume
and the marginal propensity to save must always sum to one:
marginal propensity to consume + marginal propensity to save = 1.
This relationship holds both for the individual households in the economy
and for the aggregate economy. Thus if the MPS is large, the MPC must be small.
668 ∂ CHAPTER 30 AGGREGATE EXPENDITURES AND INCOME