Economics
Aggregate Expenditures Model
The Aggregate Expenditures Model is an economic framework that examines the total spending in an economy, including consumption, investment, government spending, and net exports. It is based on the idea that total spending drives the level of economic output and income. The model helps to analyze the relationship between aggregate expenditures and the level of real GDP.
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9 Key excerpts on "Aggregate Expenditures Model"
eBook - PDF- Rhona C. Free(Author)
- 2010(Publication Date)
- SAGE Publications, Inc(Publisher)
31 Aggregate Expenditures Model AND EQUILIBRIUM OUTPUT MICHAEL R. MONTGOMERY University of Maine A ggregate expenditures (AE), the total spending in an economy on final goods and services over a designated time period, is the core demand-side concept in modern macroeconomics (a final good is a newly produced good bought by a user who will finally dispose of that good by using up its services). Following the lead of John Maynard Keynes in his General Theory of Employment, Interest and Money (1936/1965) and early Keynesians such as Alvin Hansen (1953) and Paul A. Samuelson (1939), AE is typically broken down by major type of purchaser into consumption expenditures, invest-ment expenditures, government expenditures, and the sum of exports less imports (known as net exports). The study of these categories in recent decades has been aided con-siderably by the development of the National Income and Product Accounts (NIRA) accounting system, which is used by governments in measuring and reporting the sizes of these categories. The sum of this spending is known as gross domestic product, or GDP. Specifically, • Consumption expenditures are expenditures on final goods (excluding housing) and services by consumers, produced during the accounting period and in the economy under study. • Investment expenditures are final goods and services purchased by businesses and buyers of homes, produced during the accounting period and in the economy under study. They include nonresidential structures of all types, plus all producers' durable equipment, plus residential structures, plus all inventories produced in the accounting period (some of these inventories may be planned, or desired, inventories; others may be unplanned, or undesired, inventories—unplanned inventories being acquired when sales are less than anticipated). Investment expenditures do not include financial transactions such as the purchase of stocks and bonds.
eBook - PDFMacroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 200 Part 2 Fundamentals of Macroeconomics 9-4 Aggregate Expenditure and Income The big idea so far in this chapter is that consumption depends on income, other things constant; this link is one of the most stable in all of macroeconomics. Let’s build on that connection to learn how total spending in the economy changes with income. If we try to confront the economy head-on, it soon becomes a bewildering maze, which is why we make progress by starting with simple models. We continue to assume, as we did in developing the circular-flow model, that there is no capital depreciation and no business saving. Thus, we can say that each dollar of spending translates directly into a dollar of income. Therefore, gross domestic product, or GDP, equals aggregate income. 9-4a Components of Aggregate Expenditure When income increases, consumption increases. As noted already, the marginal propensity to consume indicates the fraction of each addi- tional dollar of income that is spent on consumption. For example, if the marginal propensity to consume is 4/5 (four-fifths), spending in- creases by $4 for every $5 increase in income. The consumption func- tion shows how much consumption increases with income. For simplicity, we continue to assume that investment, govern- ment purchases, and net exports are independent of the economy’s income level. 9-3c Net Exports The rest of the world affects aggregate expenditure through imports and exports and has a growing influence on the U.S.
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
We examine the impact of net taxes in the next few chapters. Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 532 Part 6 Fundamentals of Macroeconomics 23-4 Aggregate Expenditure and Income The big idea so far in this chapter is that consumption depends on income, other things constant; this link is one of the most stable in all of macroeconomics. Let’s build on that connection to learn how total spending in the economy changes with income. If we try to confront the economy head-on, it soon becomes a bewildering maze, which is why we make progress by starting with simple models. We continue to assume, as we did in developing the circular-flow model, that there is no capital depreciation and no business saving. Thus, we can say that each dollar of spending translates directly into a dollar of income. Therefore, gross domestic product, or GDP, equals aggregate income. 23-4a Components of Aggregate Expenditure When income increases, consumption increases. As noted already, the marginal propensity to consume indicates the fraction of each addi- tional dollar of income that is spent on consumption. For example, if the marginal propensity to consume is 4/5 (four-fifths), spending in- creases by $4 for every $5 increase in income. The consumption func- tion shows how much consumption increases with income. For simplicity, we continue to assume that investment, govern- ment purchases, and net exports are independent of the economy’s income level.
eBook - PDF- William Boyes, Michael Melvin(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
top: ª Carsten Reisinger/Shutterstock CHAPTER 9 Aggregate Expenditures Preview To understand why real GDP, unemployment, and inflation rise and fall over time, we must know what causes the aggregate demand and aggregate supply curves to shift. We cannot understand why the U.S. economy has experienced 11 recessions since 1945 or why, in the 1990s and 2000s, we witnessed the longest peacetime business-cycle expansion in modern times, or why there was a global recession in 2008–2009 unless we understand why the AD and AS curves shift. In this chapter, we examine in more detail the demand side of the economy. FUNDAMENTAL QUESTIONS 1. How are consumption and saving related? 2. What are the determinants of consumption? 3. What are the determinants of investment? 4. What are the determinants of government spending? 5. What are the determinants of net exports? 6. What is the aggregate expenditures function? ª Lewis Tse Pui Lung/Shutterstock.com 173 Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. In the chapter titled “Macroeconomic Equilibrium: Aggregate Demand and Supply,” we discussed how the price level affects aggregate expenditures through the interest rate, international trade, and wealth effects. This chapter examines the nonprice determi-nants of spending and shifts in aggregate demand in greater detail and assumes that the price level is fixed. This assumption means that the aggregate supply curve is a horizon-tal line at the fixed-price level. This approach was used by John Maynard Keynes, who analyzed the macro economy during the Great Depression.
eBook - PDF- Irvin B. Tucker, Irvin Tucker(Authors)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
............................................................................................................................................................................................................................................. SUMMARY OF CONCLUSION STATEMENTS • At the equilibrium level of real GDP, the total value of goods and services produced (real GDP, Y ) is precisely equal to the total spending for these goods and services (aggregate expenditures, AE). • Aggregate expenditures in Keynesian economics pull aggregate output either higher or lower toward equilibrium in the economy, as opposed to the classical view that aggregate output generates an equal amount of aggregate spending. • Any initial change in spending by the government, households, or firms creates a chain reaction of further spending, which causes a greater cumulative change in aggregate expenditures. STUDY QUESTIONS AND PROBLEMS 1. Assume the level of autonomous investment is $100 billion and aggregate expenditures equal consumption and investment. Based on the fol-lowing table, answer the questions below. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CHAPTER 9 | The Keynesian Model in Action 253 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
- Mohammed F Khayum(Author)
- 2019(Publication Date)
- Routledge(Publisher)
5 A Theoretical Model This chapter discusses the theoretical model that has guided the empirical work in this study. The first section describes the ratio-nale for the equations that represent the critical relationships in the expenditure, monetary, production, and external sectors. In section 2 a model is proposed consisting of an aggregate demand equation, an aggregate supply equation, and a balance of payments equation which are derived from the equations pertaining to the sectors identi-fied above. The model is then used to analyze the behavior of output, inflation, and the balance of payments. The comparative static re-sults of the basic model are also considered to provide insights about the impact of different policy parameters on the endogenous vari-ables in the system of equations. In order to minimize problems of reference the notation for the variables in the model are listed in alphabetical order in Table 5.1. Nature of the Model The model is an attempt to integrate three main ideas. The first is that the economy is open in terms of aggregate demand and aggre-gate supply with some common factors influencing both the demand and supply sides. This raises the possibility of ambiguous outcomes for the price level and output given shifts in aggregate demand and aggregate supply which result from disturbances in factors that are common to both of these schedules. An assessment of the relative magnitudes of shifts and the slopes of these functions therefore, be-comes an important consideration in the analysis. The second idea is that the model should account explicitly for the role played by in-stitutional circumstances and structural factors either as constraints 110
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2014(Publication Date)
- Openstax(Publisher)
Importance of the Aggregate Demand/Aggregate Supply Model Macroeconomics takes an overall view of the economy, which means that it needs to juggle many different concepts. For example, start with the three macroeconomic goals of growth, low inflation, and low unemployment. Aggregate demand has four elements: consumption, investment, government spending, and exports less imports. Aggregate supply reveals how businesses throughout the economy will react to a higher price level for outputs. Finally, a wide array of economic events and policy decisions can affect aggregate demand and aggregate supply, including government tax and spending decisions; consumer and business confidence; changes in prices of key inputs like oil; and technology that brings higher levels of productivity. The aggregate demand/aggregate supply model is one of the fundamental diagrams in this course (like the budget constraint diagram introduced in the Choice in a World of Scarcity chapter and the supply and demand diagram introduced in the Demand and Supply chapter) because it provides an overall framework for bringing these factors together in one diagram. Indeed, some version of the AD/AS model will appear in every chapter in the rest of this book. 11.6 | Keynes’ Law and Say’s Law in the AD/AS Model By the end of this section, you will be able to: • Identify the neoclassical zone, the intermediate zone, and the Keynesian zone in the aggregate demand/aggregate supply model • Use an aggregate demand/aggregate supply model as a diagnostic test to understand the current state of the economy The AD/AS model can be used to illustrate both Say’s law that supply creates its own demand and Keynes’ law that demand creates its own supply. Consider the three zones of the SRAS curve as identified in Figure 11.11: the Keynesian zone, the neoclassical zone, and the intermediate zone. Chapter 11 | The Aggregate Demand/Aggregate Supply Model 275
eBook - ePub- Ola Olsson(Author)
- 2013(Publication Date)
- Routledge(Publisher)
Part III Macroeconomic Policy
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11 IS—MP, Aggregate Demand, and Aggregate Supply
DOI: 10.4324/9780203139936-14In this third part of the book, we will now shift our focus in order to analyze the effects of macroeconomic policy. Most of this chapter will be based on the IS—MP model of the goods and money markets. This model is not micro-founded since it is not based on optimizing household behavior. Instead, it follows in the Keynesian tradition of assuming certain behaviors of variables at the macro level. Only the specifications of aggregate supply will rely on micro foundations. The analysis in this chapter is therefore quite different from the analysis in most other chapters.We start off with the traditional Keynesian framework where we discuss aggregate expenditure and multipliers. We then derive the aggregate demand function from equilibria in the goods and money markets. We also elaborate on the properties of the aggregate supply function under varying assumptions of price and wage stability and provide an overview of the Lucas critique of traditional Keynesian economic policy. After that, we present a new model that introduces financial intermediation into the standard IS—MP framework. Finally, we also present some of the main ideas in the so-called new Keynesian paradigm.11.1 Aggregate Expenditure and the Multiplier
The traditional Keynesian model focuses to a great extent on aggregate demand. The typical starting point is an equation describing the user side of the economy. Let total output be Y, then total expenditure in a closed economy model (we assume away exports X and imports M) is Et = Ct + It + Gt . In equilibrium, we should have that total expenditure equals total output so that Et = Yt . As noted in Chapter 8 , the Keynesian consumption function is often described aswhere ca > 0 is referred to as the autonomous part of consumption, which is independent of income, cmpc ∈ (0, 1) is the marginal propensity to consume (MPC), τ is the (percentage) income tax rate, and YdC t=c a+c mpcY t d=c a+c mpc( 1 − τ )Y t,
eBook - PDF- Manzur Rashid, Peter Antonioni(Authors)
- 2015(Publication Date)
- For Dummies(Publisher)
The IS‐LM model is an important model that shows how the economy responds to fiscal and monetary policy in the very short run. Check out the free article at www.dummies.com/extras/macroeconomicsuk for details. Part III Building a Model of the Economy © John Wiley & Sons In this part . . . ✓ ✓ Aggregate demand makes up one half of the Aggregate Demand–Aggregate Supply (AD–AS) model. Find out what makes up aggregate demand and examine the AD curve. ✓ ✓ Aggregate supply makes up the other half of the AD–AS model. Discover what factors affect how much firms can produce and how aggregate supply affects prices and economic growth. ✓ ✓ After you understand both sides of the AD–AS model, you can put it to work analysing shocks to the economy. Chapter 7 Working Out a Country’s Economic Demand In This Chapter ▶ ▶ Introducing aggregate demand ▶ ▶ Understanding its different components ▶ ▶ Looking at the aggregate demand curve E conomists love models. We don’t mean the men and women who grace the world’s catwalks (although some may – who are we to judge?), but models of how the economy behaves. The Aggregate Demand–Aggregate Supply (AD–AS) model is the workhorse model of macroeconomics. Economists love it because it’s a simple model that can accurately predict how the economy will respond to different situations. In this chapter you discover one half of the AD–AS model – aggregate demand (AD). As its name suggests, you can think of AD as representing the com‑ bined demand for goods and services of all economic agents: in other words, the combined demand of consumers, firms and the government. (To read about aggregate supply (AS), flip to Chapter 8.) We describe the various parts that make up aggregate demand and examine the AD‐curve. Along the way you see why AD increases when the price level falls and how the exchange rate affects a country’s net exports.
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