Planned aggregate expenditure

Aggregate expenditure is the current value of all the finished goods and services in the economy. In economics, planned aggregate expenditure expenditure is the current value of all the finished goods and services in the economy. It is the sum of all the expenditures undertaken in the economy by the factors during a specific time period.

The consumption function relates the level of consumption in a period to the level of disposable personal income in that period. In this section, we incorporate other components of aggregate demand: investment, government purchases, and net exports. In doing so, we shall develop a new model of the determination of equilibrium real GDP, the aggregate expenditures model. This model relates aggregate expenditures , which equal the sum of planned levels of consumption, investment, government purchases, and net exports at a given price level, to the level of real GDP. We shall see that people, firms, and government agencies may not always spend what they had planned to spend. If so, then actual real GDP will not be the same as aggregate expenditures, and the economy will not be at the equilibrium level of real GDP.

Planned aggregate expenditure

Aggregate expenditure is the current value of all the finished goods and services in the economy. In economics, aggregate expenditure is the current value of all the finished goods and services in the economy. It is the sum of all the expenditures undertaken in the economy by the factors during a specific time period. Written out the equation is: aggregate expenditure equals the sum of the household consumption C , investments I , government spending G , and net exports NX. The aggregate expenditure determines the total amount that firms and households plan to spend on goods and services at each level of income. The aggregate expenditure is one of the methods that is used to calculate the total sum of all the economic activities in an economy, also known as the gross domestic product GDP. The gross domestic product is important because it measures the growth of the economy. Aggregate Expenditure : This graph shows the aggregate expenditure model. A shift in supply or demand impacts the GDP. An economy is at equilibrium when aggregate expenditure is equal to the aggregate supply production in the economy. The economy is not in a constant state of equilibrium. Instead, the aggregate expenditure and aggregate supply adjust each other toward equilibrium. When there is excess supply over the expenditure, there is a reduction in either the prices or the quantity of the output which reduces the total output GDP of the economy.

Even more important, the increase in real GDP is greater than the increase in planned investment, planned aggregate expenditure. Our equilibrium point, our change in our equilibrium, so our delta in output actually went up by more. It refers to the quantity of output that the economy can produce with full employment of its labor and physical capital.

If you're seeing this message, it means we're having trouble loading external resources on our website. To log in and use all the features of Khan Academy, please enable JavaScript in your browser. Search for courses, skills, and videos. The Keynesian cross. About About this video Transcript. Showing how a change in government spending can lead to a new equilibrium.

Aggregate expenditure is the current value of all the finished goods and services in the economy. In economics, aggregate expenditure is the current value of all the finished goods and services in the economy. It is the sum of all the expenditures undertaken in the economy by the factors during a specific time period. Written out the equation is: aggregate expenditure equals the sum of the household consumption C , investments I , government spending G , and net exports NX. The aggregate expenditure determines the total amount that firms and households plan to spend on goods and services at each level of income. The aggregate expenditure is one of the methods that is used to calculate the total sum of all the economic activities in an economy, also known as the gross domestic product GDP. The gross domestic product is important because it measures the growth of the economy. Recall from chapter 4 that the investment component of GDP includes business fixed expenditures such as a business purchasing new machinery, new vehicles, building a new factory, etc.

Planned aggregate expenditure

Just as a consumption function shows the relationship between real GDP or national income and consumption levels, the investment function shows the relationship b etween real GDP and investment levels. When businesses make decisions about whether to build a new factory or to place an order for new computer equipment, their decision is forward-looking, based on expected rates of return, and the interest rate at which they can borrow for the investment expenditure. Investment decisions do not depend primarily on the level of GDP in the current year. Thus, the investment function can be drawn as a horizontal line, at a fixed level of expenditure. The slope of the investment function is zero, indicating no relationship between GDP and investment. Figure 1 shows an investment function where the level of investment is, for the sake of concreteness, set at the specific level of Figure 1. The Investment Function. The investment function is drawn as a horizontal line because investment is based on interest rates and expectations about the future, and so it does not change with the level of current national income. In this example, investment expenditures are at a level of

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What is the aggregate expenditure formula? They're saying that consumption is a function of this right over here; the same way we would say that F is a function of X, but if you give me a Y-T or essentially if you give me a disposable income right over here, I will give you a consumption. Output is equal to expenditures so we get our 45 degree line looks something like this. Why are there statistics that measure the economics output and income. Search for courses, skills, and videos. When aggregate demand increases its graph shifts to the right. The Marginal Propensity to Consume and the Multiplier We can compute the multiplier for this simplified economy from the marginal propensity to consume. Fourth-round increase of…. As household wealth increases, so will expenditure. Thus, the greater the multiplier, the greater will be the impact on income of a change in autonomous aggregate expenditures. So although it sounds logical, I see that there are so many assumptions to make to make some logic out of it. Key points. Let us explore why. Therefore, as firms expect greater future profitability, their appetite for investment risk will increase.

The Aggregate Expenditure function gives planned expenditure AE.

To simplify further, we will assume that depreciation and undistributed corporate profits retained earnings are zero. Aggregate expenditures total spending and real GDP real output. The degree line shows all the points at which aggregate expenditures AE equal real GDP, as required for equilibrium. If you are truck shopping, you may have wanted a slate-colored truck but have to settle for a blue one. When purchasing a meal from a restaurant or hiring a lawyer, you rarely think about the interest rate. Each person who receives an additional dollar faces this choice. The aggregate expenditure equals the aggregate consumption plus planned investment. Answers to Try It! That is, given a certain amount of capital and resources per worker, it's very hard to produce a certain amount for a sustained period of time. One of the commonly used terms in economics is ceteris paribus , which is Latin phrase that means "other things being equal. Output is equal to expenditures so we get our 45 degree line looks something like this. A restaurant buys new tables for expansion. Therefore, as firms expect greater future profitability, their appetite for investment risk will increase. Suppose that the only difference between real GDP and disposable personal income is personal income taxes. This is autonomous.