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Understanding Economic Activity: Measuring Aggregate Expenditures and Their Components

This chapter explores the key components of aggregate expenditures—Consumption (C), Investment (I), Government spending (G), and Net Exports (X-M)—and their influence on economic activity. It highlights personal consumption trends and the factors affecting them, such as income, consumer confidence, and wealth. Additionally, it examines the functions of gross private domestic investment and government expenditures while detailing the equilibrium level of income and output within a Keynesian framework. The relationship between investment changes and the overall income is analyzed through the multiplier effect, emphasizing the importance of short-term economic indicators.

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Understanding Economic Activity: Measuring Aggregate Expenditures and Their Components

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  1. CHAPTER 12 Measuring Economic Activity

  2. Chapter Outline • Components of aggregate expenditures C + I + G + (X-M) • Personal Consumption Expenditures (C) • Factors affecting consumption • Relation between consumption and income • MPC, MPS • Gross Private Domestic Investment (I) • Factors affecting (I) • Investment function

  3. Chapter Outline Cont… • Government Expenditures • Fiscal Policy • Government function • Net Exports • Exports, Imports and net exports function • Aggregate expenditure function • Equilibrium level of income and output • Changes in equilibrium

  4. Short-run Model Y= C + I + G + (X-M) ~ open economy Y= C + I + G ~ Keynesian framework • The Focus is on the short-run. “In the long-run, we are all dead” -Keynes • The theory was developed after the Great Depression

  5. Consumption Function Factors affecting personal consumption C= f[ Y, Tp,r, CC, W, CR, D] Y= disposable income Tp= personal taxes r = real interest rate CC = consumer confidence W = wealth CR = availability of consumer credit How are these Variables related to consumption?

  6. C C C C MPC = < 1 Y Y C

  7. Gross Private Domestic Investment Keynes assumed autonomous Investment Autonomous Investment Induced Investment C I I I Y Y

  8. Government Expenditures G Autonomous Government Expenditures G Y

  9. Net exports & Currency exchange rate N= [ E-M] Exports – Autonomous Imports – a funtion of domestic real Imports Exports m M= M0 + m1Y M

  10. Aggregate Expenditures C + I + G + (X-M) Y Assumes that consumption is the only component that varies with income. Equilibrium= E=Y Agg. Exp=Agg. output E A E 45o Y O Planned and unplanned inventories

  11. Change in Equilibrium Y E2 B E1 A I O Y Y

  12. Multiplier • Relation between change in investment and change in income M= Y Multiplier can be defined as : m= 1/1-MPC I Y = m * I

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