Aggregate expenditure is a measure of the total amount of money spent by households, businesses, and the government on final goods and services in an economy. It is a key concept in macroeconomics and is used to analyze the level of economic activity in a country.
There are four components of aggregate expenditure: consumption, investment, government spending, and net exports. Consumption refers to the amount of money spent by households on goods and services for personal use. Investment refers to the amount of money spent by businesses on capital goods such as machinery and equipment, as well as the construction of new buildings. Government spending refers to the amount of money the government spends on goods and services, including infrastructure and public services. Net exports refer to the difference between the value of a country's exports and the value of its imports.
Aggregate expenditure is a crucial factor in determining the level of economic activity in an economy. When aggregate expenditure is high, it indicates strong demand for goods and services, which can lead to increased production and economic growth. On the other hand, when aggregate expenditure is low, it can lead to a decrease in production and economic downturn.
The relationship between aggregate expenditure and economic activity can be illustrated using the aggregate demand curve. The aggregate demand curve shows the relationship between the price level and the level of aggregate expenditure in an economy. When the price level is high, the aggregate expenditure is low, as households and businesses are less willing to spend money on goods and services. Conversely, when the price level is low, the aggregate expenditure is high, as households and businesses are more willing to spend money on goods and services.
In summary, aggregate expenditure is a measure of the total amount of money spent by households, businesses, and the government on final goods and services in an economy. It is a key factor in determining the level of economic activity and is influenced by the four components of consumption, investment, government spending, and net exports.
Aggregate Expenditures Model: Formula, Example
To determine net exports, economists subtract a country's total imports from total exports. Because we assume that the price level in the aggregate expenditures model is constant, GDP equals real GDP. On the other hand, if there is an excess of expenditure over supply, then there is excess demand leading to an increase in prices or output. Firms determine a level of investment they intend to make in each period. It can also do so by increasing transfer payments, such as food stamps and unemployment insurance, to people and firms. Recession: This graph shows the economic recession that occurred in the U.
An increase in the aggregate price level causes the AE curve to shift downward. Crowding out can occur because the initial increase in spending can cause an increase in the interest rates or the price level. His research produced the following table. At point H, the level of aggregate expenditure is below the 45-degree line, so that the level of aggregate expenditure in the economy is less than the level of output. Again, taxes can complicate the situation but for simplicity, we will assume that they are constant and incorporated into the consumption portion of our graph. Putting It Together: The Aggregate Expenditure Function The final step in deriving the aggregate expenditure function, which shows the total expenditures in the economy for each level of real GDP, i s to sum the parts, which is shown in Table 3.
Use of the Multiplier Effect The multiplier effect is a tool that is used by governments to attempt to stimulate aggregate demand in times of recession or economic uncertainty. When aggregate demand increases its graph shifts to the right. This relationship between income and consumption is called the consumption function. These conclusions can be applied to a more realistic view of the economy. Figure 3 below shows the equilibrium GDP in the aggregate expenditures model. In Figure 4 b , the marginal propensity to import is 0. The Aggregate Expenditures Model in a More Realistic Economy Four conclusions emerge from our application of the aggregate expenditures model to the simplified economy presented so far.
Economic Equilibrium An economy is said to be at equilibrium when aggregate expenditure is equal to the aggregate supply production in the economy. Government Expenditure The Keynesian model propagates an active state to control and regulate the economy. For example from 2008 to 2009, the U. If this is occurring throughout an entire economy then we will see GDP will begin to decrease as companies work to slow their production. In a simplified economy, the slope of the AE curve is the marginal propensity to consume MPC. Check out our explanation: Aggregate Expenditures Example Here is an example that helps us better understand the idea of aggregate expenditures. The model is used to show how increases in aggregate demand leads to increases in prices inflation and in output.
Spend 90% of income. National income can change as a direct result in a change in spending whether it is private investment spending, consumer spending, government spending, or foreign export spending. This exacerbated the over-supply problem as unemployed people had to cut back on their spending. Panel a shows aggregate expenditures curves for three different price levels. Growth in GDP can be explained by investment in physical capital and human capital per person, as well as advances in technology. Thus, for this example, we assume that disposable personal income and real GDP are identical. The multiplier applies to any type of expenditure e.
The multiplier effect works because a change in autonomous aggregate expenditures causes a change in real GDP and disposable personal income, inducing a further change in the level of aggregate expenditures, which creates still more GDP and thus an even higher level of aggregate expenditures. In this example, we assume the multiplier is 2. It is the sum of all the expenditures undertaken in the economy by the factors during a specific time period. The aggregate expenditure determines the total amount that firms and households plan to spend on goods and services at each level of income. Hence Keynes believed that the government played an important role in the determination on the Aggregate Expenditure in an economy and was thus included Government Expenditure in the Aggregate Expenditure Function. On the other hand, a decrease in the real interest rate make it cheaper to borrow and will therefore lead to an increase in aggregate expenditure. Answers to Try It! Real Interest Rate Spending on durable goods is likely to be affected when the real interest rate changes.
Aggregate expenditure : definition of Aggregate expenditure and synonyms of Aggregate expenditure (English)
The equations for the simplified economy are easier to work with, and we can readily apply the conclusions reached from analyzing a simplified economy to draw conclusions about a more realistic one. The AD-AS model includes price changes. Retrieved 13 November 2011. Sketch three aggregate expenditures curves for price levels of P 1, P 2, and P 3, where P 1 is the lowest price level and P 3 the highest you do not have numbers for this exercise; simply sketch curves of the appropriate shape. Table 2 revises the earlier table on the consumption function so that it takes taxes into account. In reality, many economists argue that the economy operates at an under-employment equilibrium.
Induced aggregate expenditures vary with real GDP, as in Panel b. Household consumption is the total annual amount that consumers spend on goods and services. As you will expect, people consume more as their disposable income increases. . When all these components are added together, we have the total GDP of a country. The Consumption Function Before and After Taxes. We see consumption can fall to some degree during a recession such as during the 2008 financial crisis.