Planned aggregate expenditure

Aggregate expenditure is the current value of all the finished goods and services in the economy.

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.

Planned aggregate expenditure

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. As we saw in the chapter that introduced the aggregate demand and aggregate supply model, a change in investment, government purchases, or net exports leads to greater production; this creates additional income for households, which induces additional consumption, leading to more production, more income, more consumption, and so on. The aggregate expenditures model provides a context within which this series of ripple effects can be better understood. A second reason for introducing the model is that we can use it to derive the aggregate demand curve for the model of aggregate demand and aggregate supply. To see how the aggregate expenditures model works, we begin with a very simplified model in which there is neither a government sector nor a foreign sector. Then we use the findings based on this simplified model to build a more realistic model. 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. To develop a simple model, we assume that there are only two components of aggregate expenditures: consumption and investment. In the chapter on measuring total output and income, we learned that real gross domestic product and real gross domestic income are the same thing.

Provided by : Wikimedia. So, in equilibriumwe have the total spending on goods equal to the level of real output. On the other hand, if inventories fall more than expected, planned aggregate expenditure actual investment will be less than planned investment.

Keynesian Model of Aggregate Planned Expenditure. Main Concept. According to the Keynesian model of macroeconomics, aggregate planned expenditure PE is determined as the sum of planned consumption expenditures C , planned investment expenditures I , planned government expenditures G and planned net exports NX :. The degree to which consumption changes in response to a change in disposable income depends on the marginal propensity to consume MPC. Investment expenditure, government expenditure, and net exports are all set to be exogenous variables in this model, meaning that they do not vary with the current level of real GDP and so must be determined by external forces such as government policy and foreign exchange. In more advanced macroeconomics models, net exports is also be considered to be an endogenous variable and so changes the slope of the graph by adjusting the marginal propensity to spend. In the diagram below:.

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.

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.

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When this is occurring an individual store may realize that product is not moving quickly off the shelves. Posted 12 years ago. There will still be some frictional or structural unemployment, but when the economy is operating with zero cyclical unemployment, the economy is said to be at the natural rate of unemployment, or at full employment. The difference between actual investment and planned investment will be caused by an unexpected change in inventories. Aggregate expenditure is the current value of all the finished goods and services in the economy. To develop a simple model, we assume that there are only two components of aggregate expenditures: consumption and investment. Previous: Unemployment. Second, notice that the slope of the aggregate expenditures curve is flatter for the more realistic economy in Panel b than it is for the simplified economy in Panel a. Create a free account to save this explanation. Table People will say oh my inventories are building up. From a Keynesian point of view, we could say well you want to just shift this actual curve and there's a bunch of ways in which you can shift the curve. The investment demand curve slopes downward. What affects aggregate expenditure?

The model starts with the expenditure categories defined and measured in national accounts and described in Chapter 4. Then we can write:. Expenditure as measured by national accounts is the sum of actual expenditures by business and households.

What is the significance of holding price levels constant while studying this model? On the right-hand side, we have the real output level. Our independent variable is going to be aggregate income or GDP, however you want to view it, and then our vertical axis is expenditures. As goods started to pile up in their warehouses, firms reduced production and laid off workers. If the economy is at its equilibrium real GDP, then firms are selling what they plan to sell that is, there are no unplanned changes in inventories. Here is an example. If income levels are actually zero, this consumption counts as dissaving , because it is financed by borrowing or using up savings. Test your knowledge with multiple choice flashcards. Remember that GDP can be thought of in several equivalent ways—it measures both the value of spending on final goods and also the value of the production of final goods. This shift is graphed using the AD-AS model which determines the output and price for the good or service. Physical and human capital improvements with technological advances will increase overall productivity and, thus, GDP. Therefore, the greater the cash flow for a company, the greater the ability to engage in these investment projects. It means only that government spending changes when Congress decides on a change in the budget, rather than shifting in a predictable way with the current size of the real GDP shown on the horizontal axis. The second conceptual line on the Keynesian cross diagram is the degree line, which starts at the origin and reaches up and to the right.