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    PPT - Aggregate Expenditure

    Aggregate Expenditurez

    • Statisticians and economists develop accounting systems based on the circular flow

    • Measured using GDP

      • Expenditure Approach: addition of all final expenditures within a country given a period of time
      • National income Approach: addition of all income earned from factors of production that produce goods and services agiven a period of time
      • Output approach: addition of all value of goods and services produced in a country given a period of time

    • AE is

      • the total amount that firms, households and government plan to spend on final goods and services at each level of income
      • Calculated as $AE=C+I+G+(X-M)$
      • Is also the expenditure method of calculating GDP

    Consumption

    • $C$ - Household expenditure on durable goods, non-durable goods and services
      • Durables last over 3 years
      • Non-durables last less than three years
      • Services are non-commodity items
      • Autonomous vs discretionary
        • Discretionary - change spending based on level of income - higher quality
    • Approximately $58%$ of AG.
    • Factors affecting consumption include

      • Disposable income - an increase would lead to an increase in expenditure - higher purchasing power

      • Interest rates - If interest rates go up, people prefer to save over spending

      • Availability of credit - the more credit, the more people take out money and spend it

      • Stock of personal wealth - self-explanatory

      • Expectations - expectations of the whole economy, measured in economic downturn, recession, upswing

      • Government Policies

        • Fiscal - if people get more money, the economy does well, you are likely to spend more money
        • Monetary - the **cash rate

    Investment

    • $I$ - Expenditure on producer or capital goods that are used to produce final goods and services in the future
    • Investment by private firms
      • Fixed investment (usually on capital goods)
      • Residential fixed investment (private expenditure on new housing)
      • Changes in business inventories (stocks of goods that have been produced but not yet sold)
    • Approximately $18%$ of AG
    • Factors affecting investment include

      • Rate of interest

        • Nominal - does nor account for inflation
        • Real - accounts for inflation

      • Business Expectations

        • Decrease/increase investment based on how businesses expect the economy to behave in the future

      • Level of past profits

        • Like expectations

      • Government policies

        • Fiscal & Monetary once again

    Government

    • $G$ - government expenditure on all the levels of government
    • 2 parts:
      • $G1$: current government expenditure on day to day functions - rent on offices
      • $G2:$ investment and expenditure on future needs e.g. schools and roads
    • Approximately $24%$ of AG
    • Factors affecting government expenditure include

      • Government policy objectives

        • e.g. policy to make the peoples smart - education $\rightarrow$ would lead to more schools being built

      • Current economic climate

        • Decrease expenditure during high inflation, etc.

    Net Exports

    • $X-M$ - Value of exports minus value of imports
    • Factors affecting net exports include

      • Exchange rate

        • If the dollar appreciates, imports become cheaper and exports become more expensive, in net leasing to less net exports and thus less AE

      • Domestic and overseas economic activity

        • If domestic activity increases then imports will increase (capital)
        • If overseas activity increases then exports will increase (their capital)

      • Tariffs and Quotas

        • If a foreign economy places a tariff on exports, net exports would decrease
        • Quotas are limitations