Samuelson's Economic Theories
BIG ISSUES OF ECONOMIC CONCERN
Samuelson has offered the world many economic theories. One area he is widely known for is his views on the spending multiplier. Samuelson has presented a way through his aggregate demand model to demonstrate how the spending multiplier affects individual types of spending. There are several components of aggregate demand. The basis for understanding this model is as follows:
An increase in prices causes a drop in household assets, thus causing consumers to spend less.
Increases in domestic prices reduce exports, which causes an increase in spending on imports.
The interest rate effect is when prices increase, as does the demand for money, thus increasing the interest rate. This forces a downward pressure on investment and purchases of durable goods.
Therefore, investment, exports and consumption are all inversely related to pricing. In Samuelson 's model, government spending was the only constant. This means the government will always buy the same amount of goods no matter what the price.
The aggregate demand schedule is therefore, the sum of consumption, investment, government purchases and exports. The chart below depicts the aggregate demand schedule.
Price
Level Consumption Investment Gov. Purchases Exports Real Expenditures
(1986 $ billions)
160 400 75 100 25 600
140 450 100 100 50 700
120 500 125 100 75 800
100 550 150 100 100 9000
80 600 175 100 125 1000
Samuelson used this model to demonstrate how changes in these components would impact real expenditures. For example, the chart below shows the results if the government increased its purchases by $200 billion.
Price
Level Consumption Investment Gov. Purchases Exports Real Expenditures
(1986 $ billions)
160 700 75 300 -75 1000
140 750 100 300 -50 1100
120 800 125 300 -25 1200
100 850 150 300 0 1300
80 900 175 300 25 1400
A $200 billion rise in government purchases leads to a $300 billion increase in
Samuelson has offered the world many economic theories. One area he is widely known for is his views on the spending multiplier. Samuelson has presented a way through his aggregate demand model to demonstrate how the spending multiplier affects individual types of spending. There are several components of aggregate demand. The basis for understanding this model is as follows:
An increase in prices causes a drop in household assets, thus causing consumers to spend less.
Increases in domestic prices reduce exports, which causes an increase in spending on imports.
The interest rate effect is when prices increase, as does the demand for money, thus increasing the interest rate. This forces a downward pressure on investment and purchases of durable goods.
Therefore, investment, exports and consumption are all inversely related to pricing. In Samuelson 's model, government spending was the only constant. This means the government will always buy the same amount of goods no matter what the price.
The aggregate demand schedule is therefore, the sum of consumption, investment, government purchases and exports. The chart below depicts the aggregate demand schedule.
Price
Level Consumption Investment Gov. Purchases Exports Real Expenditures
(1986 $ billions)
160 400 75 100 25 600
140 450 100 100 50 700
120 500 125 100 75 800
100 550 150 100 100 9000
80 600 175 100 125 1000
Samuelson used this model to demonstrate how changes in these components would impact real expenditures. For example, the chart below shows the results if the government increased its purchases by $200 billion.
Price
Level Consumption Investment Gov. Purchases Exports Real Expenditures
(1986 $ billions)
160 700 75 300 -75 1000
140 750 100 300 -50 1100
120 800 125 300 -25 1200
100 850 150 300 0 1300
80 900 175 300 25 1400
A $200 billion rise in government purchases leads to a $300 billion increase in
Bibliography: Lovewell. Play it again: Paul Samuelson and the Spending Multiplier [online]. Available: http://www.ryerson.ca/lovewell/PIAG2.html Anonymous at http://nobel.sdsc.edu/laureates/economy-1970-1-bio.html Samuelson, Paul A., Foundations of Economic Analysis, Enlarged Edition, Harvard University Press, Cambridge, Massachusetts, August 1983. Samuelson, Paul A. and William D. Nordhaus, Economics, 16th Edition, University Press, Cambridge, Massachusetts, December 1997. Soros, George. "The capitalist threat." The Atlantic Monthly, (1997): February, pp. 45(11) http://www.nobel.se/laureates/economy-1970-press.html Skousen, Mark. "Samuelson retreats (slightly) from socialism." Human Events, 4/194, Vol.50 Issue 12, p11, 3/4p, lbw