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Aggregate ExpenditureRosete, Herrika Red G.Balgoa, JastineAggregate ExpenditureAggregate Expenditureis ameasure of national income. It is defined as the current value of all the finished goods and services in the economy. It is the sum total of all the expenditures undertaken in the economy by the factors during a given time period. Aggregate Expenditures is defined as: AE = C+Ip+G+Xn,here,C = Household ConsumptionIp = Planned InvestmentG = Government spendingXn = Net exports (Exports-Imports)

Aggregate ExpenditureAggregate Expenditure is one of the methods to calculate the sum total of all economic activities in an economy, which is referred to as the Gross Domestic Product of an economy. The gross domestic product which is an important measure of the growth of the economy is calculated through the Aggregate Expenditure Modelalso known as the Keynesian cross.AE is also used in theAD-AS Model which advances the Aggregate Expenditures Model with the inclusion of Price changes.Aggregate ExpenditureComponents ofAggregate Expenditure(AE) - defined as the total amount that firms and households plan to spend on goods and services at each level of income. It is normally derived from all the components of theAggregate Demand. Aggregate demand (AD) refers to the sum total of goods that are demanded in an economy over a period and thus AD is defined by the planned total expenditure in an economy for a given price level.ConsumptionThe largest component of aggregate expenditures is consumption (C). Consumption refers to the household consumption over a given period of time.Consumption goods non-durables like food items and beveragesdurables like household appliancesServices such as body spa and body work-outs. House and apartment rents as well as the rental value of owner occupied housing are included under this category.

The total household consumption can be divided into two parts, they are: Autonomous consumption refers to the amount of consumption regardless of the amount of income, hence, even if the income is zero, the autonomous consumption would be the total consumption.

Induced consumption refers to the level of consumption dependent on the level of income.

Keynes believed that peoples current income primarily determines their consumption spending. According to Keynes, disposable incomeones income after taxesis by far the most important determinant of current consumption. If disposable income increases, consumers will increase their planned expenditures.This positive relationship between disposable income and consumption spending is called consumption function. C= a + bYAt low levels of aggregate income, the consumption expenditures of households will exceed their disposable income. When income is low, households dissavethey either borrow money or draw from their past savings to purchase consumption goods. As income increases, consumption will also increase, but not as rapidly as income. This indicates that the marginal propensity to consume is less than one; some fraction of additional income is allocated to saving.

At $9 trillion, current consumption and income are equal. As income expands beyond $9 trillion, household income will exceed consumption and saving will be positive. Note that the consumption function is flatter than the 45-degree line. This indicates that as income expands, households increase their consumption by less than their increase in income.

Non-income determinants of CNet wealthValue of all assets minus liabilitiesDecrease in net wealthSpend lessC decreasesC function shifts downSave more (increase S)

Changes in price levelChanges in real value of cash and bank accountsIncrease in price levelDecreased purchasing powerDecrease CDownward shift of C functionIncrease S

Non-income determinants of CInterest rateReward for saversCost for borrowersHigher interest ratesSave moreBorrow lessSpend lessDecrease C

Non-income determinants of CConsumer expectationsFuture income increaseIncrease C nowFuture price level increaseIncrease C nowFuture interest rate increaseIncrease C now

Non-income determinants of CShifts of the Consumption FunctionCCCReal disposable incomeReal consumptionA downward shift of the consumption function, such as from C to C, can be caused by a decrease in net wealth, an increase in the price level, an unfavorable change in consumer expectations, or an increase in the interest rate. An upward shift, such as from C to C, can be caused by an increase in net wealth, a decrease in the price level, a favorable change in expectations, or a decrease in the interest rate.Ex. Given a change in your disposable income (DY) equal to PHP 100,000 and you decide to save PHP 20,000 of that extra income, how much will the multiplier be?Sol. DY=C+S compute the value of C C=DY-S C= 100,000-20,000 C= 80,000Lead to compute MPC MPC = change in C change in DYMPC=80,000/100,000 = 0.8

m = 1 = 1 1 MPC MPS 1 / 1 - 0.8 1 / 0.2m = 5

Let us further illustrate the effect of the multiplier on the equilibrium level of income. We will use the consumption function C=a + bY and the equilibrium condition AE=C in a simple economy without investment and government spending. C= total consumption ;Y= income;a= initial consumption b= MPC or the marginal propensity to consumeConsumption FunctionC = 80,000+0.8Y Since the equilibrium level of Y is AE, we can express the equilibrium condition as Y=C. Substituting the value of C in the equilibrium condition, we get:C=a + bYY =80,000+0.8YY-0.8Y =80,0000.2Y = 80,000 Y =400,0000.2 0.2

Investment (I) = 20,000Y=C + IY = a+bY+IY = 80,000+0.8Y+20,000Y-0.8Y = 80,000+20,0000.2Y = 100,0000.2 0.2Y = 500,000

a=80,000 b=0.8 MPC I=20,000 G= 25,000

Y = C + I + GY = a+bY+I+GY = 80,000+0.8Y+20,000+25,000Y-0.8Y = 80,000+20,000+25,0000.2Y = 125,0000.2 0.2Y = 625,000