We have discussed already about GDP. In this lesson, I would like to get a little bit deeper and open each variable we described it before. Consumption, household consumption, gross capital formation, or investment, government expenditure, exports, and imports. Let's start with household consumption. First question. What would be the main variable that could lead to higher household consumption? I'll wait for you to think. Let's not forget. I want to say, I want to think, I want to answer, what could trigger higher household consumption? The first thing you might say is my money, my salary, my wage. I would say for those who said all of it, you're right. But let me give you some macroeconomic explanation. What you meant was income, GDP. If your income increase, your household consumption tends to increase. You're right and do not forget that income is our GDP, something that we discussed. We know now that household consumption depends on income, but part of this income. Not all income we consume. We need to pay taxes. Yes, life is tough my friend. We need to pay taxes. Hence, I don't think that we depend just on income, but also what we call disposable income, which stands for income minus taxes. Do not forget that. Yes, do you see how macroeconomics interact to each variable, to each other. I said, GDP is my income. I understand GDP stands for C plus I plus G plus X minus M, yes, I understand. Household consumption. It depends of what? Depends of wage, depends on income. Yes, depends off my GDP. If the GDP does not increase, consumption does not increase, and does not hetero feeds my GDP. But this we'll figure out later on. Obviously, if you want to speak, household tends sometimes not consume it's all disposable income, as we discussed. That's why we include the coefficient for disposable income. What do we call? If you want to get a little bit, boring terms of macroeconomics, this coefficient, that's what we call marginal propensity to consume. Professor Dumas, it's quite complicated. Don't worry. It's just a share of your disposal income that's dedicated to your consumption, period. You don't need to memorize these name. But I want to memorize, if you want to memorize, I think is a little bit boring but anyway, its marginal propensity to consume. Is a part of your disposable income dedicate to consumption. I know it's a boring name. It represents, as I said, just a part of income that household consumption. But don't make too hard using those economy English. Sorry, my bed. I promise I'll try to stay put and do not try to bring these boring names again and give some practical manners. Just that? Does household consumption depend only on disposable income? Are you sure? But if you do not have income, let's suppose for sometimes you are unemployed. Hope not. One, two, or even three months, three years. How do you consume? I'm not consuming? Yes, you'll be a consumer otherwise you'll die. That why in our equation of consumption, we have to include what we call an autonomous variable? That's why we call Co. But what's this autonomous variable? What I meant by that, it means that household consumption depends on your disposable income. Something else, what is something else? Autonomous variable. But is this autonomous variable? You need to consume. You need to consume something that does not depend on your income. But how can I consume something that not comes from my income? You sell your assets, you borrow money, you take from someone else because you need to survive. That's something that does not depend on disposable income. For example, if you do not have income, let's say again, you are unemployed. Now it makes much more sense. You still may have to consume by selling some of your assets. Borrowing money. That's why we say, household consumption depends on your domestic income or your disposable income. Apart of it, marginal propensity to consume. Just that? No, autonomous variable, because hopefully, you are employed. But if you're unemployed, you have to consume. You'll have to sell some assets. That's why my consumption depends on my income and on autonomous variable. Pretty much easy. Now, I want to make one question. I know that consumption depends on disposable income. The question I want to make is, if the government wants to boost consumption, I'll wait you to think, what do you think that the government should decrease tax bracket from the poorest or from the richest? Think. Which way do you think it could trigger a much higher impact on consumption? Part of you, you say, well, I think we should decrease taxes from the poorest because they don't make too much money. Eventually, you're right, but the answer is wrong. No. Let's decrease the taxes from the richest. The answer is wrong. What's the answer? Think, if you decrease the taxes, for example, let think about someone very wealthy, Bloomberg or whatever it is. If you come to him and say, "Hey, guess what Bloomberg, you know what's going to happen? Your tax bracket instead of 27 percent, I will charge 25 percent." I don't think he will come to us say, "Wow, now I'm going to buy a TV." That's not going to happen. But if you slash taxes from the lower class or the poorest, all that money he was supposed to save is going straight to consumption and the economy will revive. Will retrofit. That's why we say, listen, how you read the newspaper. If the government decides to slash taxes from the richest, it's good. Eventually could boost the economy. But it's much better to slash taxes from the poorest because it's goes straight to consumption, and that what we call expansionary fiscal policy. Sorry, is just asleep. Let's go to another one. If you want obviously, just again, put in an equation, as we said, consumption is equal to C0 autonomous variable plus disposable income times marginal propensity to consume. Just if you care about the equation. Because there are some guys that say, "I care about the equation, I don't care about the equation, so disclose it for both of you." But the most important is, don't forget the principles. Disposable income, taxes, you're unemployed, but even though we have to consume, marginal propensity to consume, should they slash taxes from the poorest, from the richest? This is something you cannot forget. Don't care too much about the equation because the equation is just an elegant way to put what I'm saying. But eventually, you'll like equation here it is. Your equation.
