History

Re: Where does AD = C+I+G come from?

duffmann808 — Sun, 12 Oct 2008 18:41:38 GMT

Kilmore:
Many textbooks of macroeconomics postulate validity of such equation (AD = C + I + G). I tried to find who had written it for the first time, Keynes was on top of list of suspects, but I was unable to prove him guilty, there seems to be no mention of this equation in his General Theory... Though aggregate demand and supply are mentioned soon in the book (page 25 in original English edition) meaning of these terms is somehow arkwardly different from present ones. If not Keynes, who then? Hicks, Hansen, anyone else?

Here.

The consumption equation I have frequently pondered and been bothered by, and is in fact what I plan to write a dissertation disproving.

Re: Where does AD = C+I+G come from?

duffmann808 — Sun, 12 Oct 2008 18:31:50 GMT

IDigSluts_ky:

I am discontent with my above answer, because I am wondering why "I" isn't used instead of "S"

IOW, shouldn't Y = C + S + G = C + I + G.

You use I for investment, because investment does not mean private investment. I in this case implies companies investing in their business by buying more capital and other investments.

Re: Where does AD = C+I+G come from?

Kilmore — Sat, 11 Oct 2008 07:51:28 GMT

Answer is quite simple as I have observed few years ago when I proposed the same thing (usage of S instead of I) to my professor during some seminar. If you really replace I by S, then this equation is obviously mere accounting principle as you said in the post above. Then there is nothing interesting about it and such AD cannot be boosted or depressed at all! It is like having a cake divided into three portions. Their sum is obviously always one cake. You may take a piece of part 1 and add it to part 3, for example, but total sum cannot be changed not even slightly by such redistribution. This is revelation of true nature of Keynesian fallacy. It starts with this simple accounting equation you cannot doubt. But once you accept it as true, they use simple algebraic operations to fool you, to make you forget the reasons why it used to be true,i.e. AD is merely constant total sum of those three variables.

There are two basic methods how they achieve this. First is hidden by G. Government must tax first to be able to spend. If there are no government budget surpluses and if government does not acquire loans on financial markets, then following equation is valid (Ta for autonomous tax, t for income tax, TR for transfers).

G = Ta + tY - TR

Textbooks usually introduce C = Ca + c Yd where Yd is Y-Ta-tY+TR. Of course Yd is that part of income left after taxation. Therefore simply Yd = Y - G. Hence our AD looks this way.

AD = Ca + c (Y-G) + I + G

Now they usually try to fix investment (I) to make it independent (autonomous). Certainly it is nonsense. At least I depends on S, it cannot exceed S. Higher government spending (therefore heavier taxation) must diminish saving. Lower S means lower I. Moreover S depends on C too. Happy consuming consumer cannot certainly save what he has spent already. In another words, C+ I = Yd. Hence another improvement of AD equation.

AD = Ca + c(Y-G) + (1-c) (Y-G) + G

It is not difficult to see why AD cannot be boosted by fiscal expansion. Higher G immediately lowers C and I, those three parts of cake constitute one cake and not slightly more or less. No wonder why my professor was unwilling to write S instead of I or to look closely at G.

Moreover they like to distinguish ex ante from ex post. S might be equal to I it is admitted but only ex post (or ex ante?). If anyone could explain these differences between keynesian ex ante and ex post, I would be very thankful. It seems to me they themselves do not understand it much.

Re: Where does AD = C+I+G come from?

IDigSluts_ky — Sat, 11 Oct 2008 05:30:15 GMT

I am discontent with my above answer, because I am wondering why "I" isn't used instead of "S"

IOW, shouldn't Y = C + S + G = C + I + G.

Re: Where does AD = C+I+G come from?

IDigSluts_ky — Fri, 10 Oct 2008 22:59:07 GMT

I believe it may have arose with the advent of the National Income and Product Accounts (NIPA). Y = C + I + G is more of an accounting identity than a theory.

Re: Where does AD = C+I+G come from?

Jon Irenicus — Tue, 16 Sep 2008 22:17:32 GMT

Those are usually omitted, especially when a closed economy is assumed.

-Jon

Re: Where does AD = C+I+G come from?

krazy kaju — Tue, 16 Sep 2008 17:48:20 GMT

You forgot X (or X-M depending on who you talk to).

Re: Where does AD = C+I+G come from?

Kilmore — Sun, 07 Sep 2008 13:08:29 GMT

In fact I did not (I have only read his famous textbook back in times when I was even more stupid than today). But even if I found this equation in his writings it would not prove him to be the author. Therefore I ask anyone with greater expertise...

Re: Where does AD = C+I+G come from?

Jon Irenicus — Sun, 07 Sep 2008 12:59:46 GMT

Have you tried Samuelson? He was Keynes's greatest disciple.

-Jon

Where does AD = C+I+G come from?

Kilmore — Sun, 07 Sep 2008 12:54:49 GMT

Many textbooks of macroeconomics postulate validity of such equation (AD = C + I + G). I tried to find who had written it for the first time, Keynes was on top of list of suspects, but I was unable to prove him guilty, there seems to be no mention of this equation in his General Theory... Though aggregate demand and supply are mentioned soon in the book (page 25 in original English edition) meaning of these terms is somehow arkwardly different from present ones. If not Keynes, who then? Hicks, Hansen, anyone else?