AGGREGATE

EXPENDITURES
 In economics, Aggregate
Expenditure is a
measure of national income. Basically
it is one of the approaches to
measure GDP. It is defined as the
value of planned goods and services
produced in an economy. Where GDP
is defined as C + I + G + NX and I
= Ip + Iu (planned + unplanned
investment), Aggregate Expenditures
is defined as C + Ip + G + NX,
where:
 C= consumption (C)

 I= investment

 G= government spending

 NX= net exports (Exports-Imports)

 AE (Aggregate Expenditure) is used
in conjunction with GDP in the
Aggregate Expenditures Model to
predict future GDP direction. In this
model, when AE = GDP then the
economy is in equilibrium. According
to this model an economy will move
towards its equilibrium causing
changes in the GDP.
 Planned Investment (I) 

 Investment refers to purchases by

firms of new buildings and
equipment and additions to
inventories, all of which add to firms’
capital stocks.
 One component of investment—
inventory change—is partly
determined by how much households
decide to buy, which is not under the
complete control of firms

 Change in inventory = production –

sales
 Planned Investment (I) 
a. Desired or planned investment
refers to the additions to capital
stock and inventory that are
planned by firms.

Actual investment is the actual
amount of investment that takes
place; it includes items such as
unplanned changes in inventories.
 Components of Aggregate
Expenditure:
Consumption, Investment,
Government Purchases, and
Net Exports
 
 
1. Consumption

2. Investment

3. Government Purchases

4. Net Exports
 Consumption

A key decision in the circular flow

model we studied is how much
households spend on consumption.
Consumption and income tend to be
highly correlated.
 Investment
Gross Private Domestic Investment is
spending in three categories:
1.New factories and new
equipment, such as buildings or
computers
2.New housing
3.Net increases in inventories
 Government Purchases
 The Government Purchase Function: The
relationship between government
purchases and the level of income in the
economy, other things constant.
Government purchases are considered
autonomous that do not depend directly
on the level of income in the economy,
because spending decisions are made by
government officials.
 Net Exports

 Net Exports = Exports – Imports