WEBVTT 00:00:00.000 --> 00:00:03.000 Going with my habit of overly simplified economy let's imagine economy that 00:00:03.000 --> 00:00:07.000 has only two actors in it: so that's Mr Farmer right over here 00:00:07.000 --> 00:00:12.000 I'll do my best to draw the farmer, maybe he has the mustache of some kind 00:00:12.000 --> 00:00:15.000 so that's Mr Farmer right over here, he's got a hat on 00:00:15.000 --> 00:00:20.000 so it has Mr Farmer So that is the Farmer 00:00:20.000 --> 00:00:24.000 in this economy, and we'll also have a Builder 00:00:24.000 --> 00:00:27.000 so this economy they are producing two things: they are producing food and this Builder 00:00:27.000 --> 00:00:31.000 can help mantain stuff so maybe 00:00:31.000 --> 00:00:38.000 so maybe this is Mr Builder right over here 00:00:38.000 --> 00:00:40.000 is Mr Builder. And let's say, for the sake of 00:00:40.000 --> 00:00:44.000 do here let's say that for this economy it kind of a constant that 00:00:44.000 --> 00:00:47.000 either of these fellows gets an extra dollar to spend 00:00:47.000 --> 00:00:51.000 he is going to spend 60% of it so I'll introduce a formal word that 00:00:51.000 --> 00:00:55.000 that really is another way of saying that: in this economy 00:00:55.000 --> 00:00:59.000 the marginal propensity to consume: MPC 00:00:59.000 --> 00:01:03.000 propensity to 00:01:03.000 --> 00:01:07.000 consume is 00:01:07.000 --> 00:01:12.000 open parentesis is often MPC 00:01:12.000 --> 00:01:16.000 that is equal to say 60% 00:01:16.000 --> 00:01:18.000 and or is equal to 0.6 00:01:18.000 --> 00:01:23.000 And all this thing if someone in this economy somehow finds another dollar 00:01:23.000 --> 00:01:26.000 in their pocket they're going to spend 0.6 of that or 00:01:26.000 --> 00:01:31.000 60% of that, so if you give the Builder, if the builder gets some extra dollar 00:01:31.000 --> 00:01:35.000 he is going to spend another 60 cents on another things Farmer 00:01:35.000 --> 00:01:39.000 if the Farmer gets another dollar he is going to spend 60% 00:01:39.000 --> 00:01:43.000 or 60 cents with the builder. Now, given this assumption let's 00:01:43.000 --> 00:01:47.000 think about what'll happen in this economy if all of the sudden one of them decided to 00:01:47.000 --> 00:01:49.000 increase their spending over there: so all the sum 00:01:49.000 --> 00:01:55.000 economy let's say the farmer discovers 00:01:55.000 --> 00:01:58.000 a sac in a drawer that he didn't realise was there 00:01:58.000 --> 00:02:02.000 currency maybe get a 00:02:02.000 --> 00:02:09.000 maybe currency in that is 00:02:09.000 --> 00:02:09.000 dollar and the farmer discovers that he 00:02:09.000 --> 00:02:16.000 he discovers a big power dollar in the sac 00:02:16.000 --> 00:02:19.000 and he say and do some repairs to my building 00:02:19.000 --> 00:02:23.000 so let's we have this kind of increase in 00:02:23.000 --> 00:02:27.000 spending that's going on, so the farmer says I'm going to spend 00:02:27.000 --> 00:02:31.000 I'm going to spend 1000 dollars and I'm going to 00:02:31.000 --> 00:02:33.000 give it to the builder, now the builder says 00:02:33.000 --> 00:02:40.000 1000 dol, I have the marginal propensity to consume or 0.6 00:02:40.000 --> 00:02:42.000 he is going to spend 00:02:42.000 --> 00:02:50.000 with the farmer he is going to spend 60% 00:02:50.000 --> 00:02:56.000 times 1000 dol, which is equal to 600 dol 00:02:56.000 --> 00:03:00.000 well now the farmer says 00:03:00.000 --> 00:03:03.000 1000 somehow the builder to spend 00:03:03.000 --> 00:03:06.000 more on me much more 00:03:06.000 --> 00:03:12.000 I had 600 more I have the marginal propensity 00:03:12.000 --> 00:03:15.000 to consume of 0.6 or 60% so I'll spend 00:03:15.000 --> 00:03:17.000 60% of that 600 dol that I've just got 00:03:17.000 --> 00:03:23.000 it will be 60% of that thing so it will be 00:03:23.000 --> 00:03:27.000 60 decimal so it will be 0.6 00:03:27.000 --> 00:03:32.000 times this thing which is 0.6 00:03:32.000 --> 00:03:35.000 times 1000 or you can say 60% 00:03:35.000 --> 00:03:38.000 of this 600 dol which is going to equal to 360 dol. 00:03:38.000 --> 00:03:43.000 now the builder says 00:03:43.000 --> 00:03:48.000 I gave the initial 600 dol another 360 dollars 00:03:48.000 --> 00:03:52.000 and I have the amrginal propensity to consume of 0.6 so I'll 00:03:52.000 --> 00:03:54.000 spend 60% of that bothered on this spending 00:03:54.000 --> 00:04:00.000 he also spends 60% of this right over here and 60% of this 00:04:00.000 --> 00:04:03.000 is 0.6 times this whole thing 00:04:03.000 --> 00:04:07.000 0.6 times this thing 00:04:07.000 --> 00:04:12.000 times 0.6 times this thing - times 0.6 00:04:12.000 --> 00:04:16.000 times 1000 dol. Now this 00:04:16.000 --> 00:04:20.000 number right over here 60% of 360 dol 00:04:20.000 --> 00:04:24.000 I'd like to calculator to figure what it is exactly 00:04:24.000 --> 00:04:28.000 so let's say that I have 00:04:28.000 --> 00:04:34.000 it's 0.6 to the 3rd power 00:04:34.000 --> 00:04:37.000 0.6 to the third 00:04:37.000 --> 00:04:40.000 multiply that times 1000 00:04:40.000 --> 00:04:44.000 gives us 216 dollars. so this guy 00:04:44.000 --> 00:04:46.000 write it over here 00:04:46.000 --> 00:04:52.000 I'm going to spend 60% of that 00:04:52.000 --> 00:04:55.000 is going, and 60% of you see where it's going 00:04:55.000 --> 00:04:56.000 so it's going to be 0.6 00:04:56.000 --> 00:05:02.000 times this thing which is already 0.6 times 0.6 00:05:02.000 --> 00:05:08.000 0.6 times 0.6 to the 3rd power 00:05:08.000 --> 00:05:11.000 0.6 to the 4th power times 00:05:11.000 --> 00:05:16.000 1000 which is whatever sixty 00:05:16.000 --> 00:05:17.000 percent of 00:05:17.000 --> 00:05:24.000 0.6 gives us 115 dollars 00:05:24.000 --> 00:05:27.000 129, and this guy Oh I have 00:05:27.000 --> 00:05:32.000 spend 60% of that, and this goes on and on 00:05:32.000 --> 00:05:35.000 so given this think how much from that incremental 00:05:35.000 --> 00:05:39.000 increase of spending of a 1000 dollars how much total 00:05:39.000 --> 00:05:42.000 new production and spending happen in this economy 00:05:42.000 --> 00:05:46.000 so the way to think about that - so the total 00:05:46.000 --> 00:05:53.000 we can do the either way we can do kind of GDP 00:05:53.000 --> 00:05:56.000 output income expenditure 00:05:56.000 --> 00:06:00.000 these all views because economy is a very thing 00:06:00.000 --> 00:06:03.000 one persone's expenditure turns into another person's income 00:06:03.000 --> 00:06:07.000 we can say total output here measured in our agreed currency 00:06:07.000 --> 00:06:11.000 which is dollars this is now going to be 00:06:11.000 --> 00:06:16.000 original 1000 farmer spend for the builder 00:06:16.000 --> 00:06:21.000 original 1000 plus this 1st right over here 00:06:21.000 --> 00:06:24.000 this that the builder spent 00:06:24.000 --> 00:06:28.000 .6 times 1000 plus 00:06:28.000 --> 00:06:31.000 than we have this time the farmer said I'm 00:06:31.000 --> 00:06:39.000 6 square 00:06:39.000 --> 00:06:40.000 times 1000 and than this guy 00:06:40.000 --> 00:06:42.000 I spend 60% of that 00:06:42.000 --> 00:06:48.000 and spend gives 3rd power 00:06:48.000 --> 00:06:52.000 1000 + 0.6 to the 3rd power times 00:06:52.000 --> 00:06:55.000 1000 and that the last 00:06:55.000 --> 00:06:59.000 keep going on and on forever theoretically 00:06:59.000 --> 00:07:04.000 6 + 0.6 to the 4th power 00:07:04.000 --> 00:07:08.000 times 1000 and this will keep going on and on 00:07:08.000 --> 00:07:11.000 forever plus 0.6 to the 5th power 00:07:11.000 --> 00:07:15.000 0.6 to the 6th power and going on and on forever 00:07:15.000 --> 00:07:21.000 and one of those things about mathematics 00:07:21.000 --> 00:07:24.000 equall multuply is that you can actually sum 00:07:24.000 --> 00:07:28.000 up because this value right over here is less than one 00:07:28.000 --> 00:07:31.000 ends up being infinite sum 00:07:31.000 --> 00:07:35.000 you can actually take this infinite sum and find number so just to simplify this 00:07:35.000 --> 00:07:40.000 the total output from that's kind of original 1000 00:07:40.000 --> 00:07:43.000 we can factured 1000 new colour 00:07:43.000 --> 00:07:48.000 so we can fracturate 1000 left with 00:07:48.000 --> 00:07:52.000 one plus 0.6 plus 00:07:52.000 --> 00:07:57.000 0.6 square + 0.6 00:07:57.000 --> 00:08:01.000 to the third power plus 0.6 to the 4th power 00:08:01.000 --> 00:08:04.000 on and on and on and on the next video 00:08:04.000 --> 00:08:10.000 just for fun, but his write over here it's an infitinite sum 00:08:10.000 --> 00:08:12.000 geometric series and this actually simplify to 00:08:12.000 --> 00:08:17.000 as one over one 00:08:17.000 --> 00:08:20.000 minus 0.6, so whatever this number is 00:08:20.000 --> 00:08:23.000 here that will be 00:08:23.000 --> 00:08:30.000 this will be equal one over 00:08:30.000 --> 00:08:34.000 0.4 and 0.4 00:08:34.000 --> 00:08:37.000 is two fifths one over two fifths 00:08:37.000 --> 00:08:40.000 which is equal to 5 halfs 00:08:40.000 --> 00:08:46.000 so your total output is going to be equal to 00:08:46.000 --> 00:08:50.000 1000 times 5 halfs 00:08:50.000 --> 00:08:54.000 and this the same thing as equal to 1000 times 2,5 00:08:54.000 --> 00:08:58.000 which is equal to 25 hundret (2500) 00:08:58.000 --> 00:09:02.000 there is two interesting ideas going here. one is when people get a bit of more income, they're going to 00:09:02.000 --> 00:09:06.000 spend some of it adn that's the marginal propensity to consume 00:09:06.000 --> 00:09:09.000 how much you 60% of that 00:09:09.000 --> 00:09:13.000 60% it keep going multiplied throw the economy 00:09:13.000 --> 00:09:17.000 multiplier fraction of that get spent 00:09:17.000 --> 00:09:20.000 some fraction of that get spent 00:09:20.000 --> 00:09:24.000 1000 that first 1000 dollars got multiplied 00:09:24.000 --> 00:09:29.000 by 2,5 and that 2,5 was completely a function of what the 00:09:29.000 --> 00:09:34.000 MPC was, so we have this relationship here 00:09:34.000 --> 00:09:37.000 is that whatever the marginal propensity to consumer is that drives 00:09:37.000 --> 00:09:41.000 the multiplier that drives the multiplier 00:09:41.000 --> 00:09:45.000 all the multiplier say if you spend an extra dollar in this economy 00:09:45.000 --> 00:09:49.000 given people's MPC how much 00:09:49.000 --> 00:09:53.000 will than increase total output