Income approach All final goods and services are produced using factors of production. Rent is the income of the property owners. Interest is the income of the money capital suppliers. Sum of the above items is the National Income NI. Adjustments: Indirect business Taxes general sales taxes, business property taxes, license fees etc. Depreciation is another cost, which should be added. Personal consumption expenditures.
Compensation of employees. Net foreign factor income earned. Indirect business taxes. Transfer payment. Undistributed corporate profits. Personal taxes. In economics, aggregate expenditure is the current value of all the finished goods and services in the economy.
It is the sum of all the expenditures undertaken in the economy by the factors during a specific time period. Written out the equation is: aggregate expenditure equals the sum of the household consumption C , investments I , government spending G , and net exports NX.
The aggregate expenditure determines the total amount that firms and households plan to spend on goods and services at each level of income. The aggregate expenditure is one of the methods that is used to calculate the total sum of all the economic activities in an economy, also known as the gross domestic product GDP. The gross domestic product is important because it measures the growth of the economy. Aggregate Expenditure : This graph shows the aggregate expenditure model. A shift in supply or demand impacts the GDP.
An economy is at equilibrium when aggregate expenditure is equal to the aggregate supply production in the economy. The economy is not in a constant state of equilibrium. Instead, the aggregate expenditure and aggregate supply adjust each other toward equilibrium. When there is excess supply over the expenditure, there is a reduction in either the prices or the quantity of the output which reduces the total output GDP of the economy.
In contrast, when there is an excess of expenditure over supply, there is excess demand which leads to an increase in prices or output higher GDP.
A rise in the aggregate expenditure pushes the economy towards a higher equilibrium and a higher potential of the GDP. An economy is said to be at equilibrium when aggregate expenditure is equal to the aggregate supply production in the economy. Identify the assumptions fundamental to classical economics in regards to aggregate expenditure at economic equilibrium. In economics, aggregate expenditure is the current value price of all the finished goods and services in the economy.
Aggregate expenditure is a method that is used to calculate the total value of economic activities, also referred to as the gross domestic product GDP. The GDP of an economy is calculated using the aggregate expenditure model. The economy is constantly shifting between excess supply inventory and excess demand. As a result, the economy is always moving towards an equilibrium between the aggregate expenditure and aggregate supply.
On the aggregate expenditure model, equilibrium is the point where the aggregate supply and aggregate expenditure curve intersect. An increase in the expenditure by consumption C or investment I causes the aggregate expenditure to rise which pushes the economy towards a higher equilibrium.
Net exports may be negative. Subsidies are transfer payments to assist industries that benefit the public, but might not survive or remain stable if operated for profit without subsidies. Farm products and rail transportation are subsidized in most modern economies.
Spending by consumers, which economists call consumption or consumption expenditure, is by far the largest part of the U. Also, consumption roughly equals household income, because people spend what they earn as income. True, they also save some of it and they borrow to spend, but let's leave that aside for now.
Business investment is the total amount of spending by businesses on plant and equipment, and it accounts for a little over 15 percent of total GDP. This might seem to be a relatively small portion of GDP for business, but it's an extremely important one. Businesses invest in productive equipment and that equipment typically creates jobs as well as goods and services. The wages and salaries that businesses pay to workers are not counted as businesses investment?
Another word for spending is demand. The total spending, or demand, in the economy is known as aggregate demand. This is why the GDP formula is the same as the formula for calculating aggregate demand. Because of this, aggregate demand and expenditure GDP must fall or rise together. However, this similarity isn't technically always there—especially when looking at GDP in the long run. Short-run aggregate demand only measures total output for a single nominal price level, or the average of current prices across the entire spectrum of goods and services produced in the economy.
Aggregate demand only equals GDP in the long run after adjusting for price level. There are several ways to measure total output in an economy. Standard Keynesian macroeconomics theory offers two such methods to measure GDP: the income approach and the expenditure approach. Of the two, the expenditure approach is cited more often.
Keynesian theory places extreme macroeconomic importance on the willingness for businesses, individuals and governments to spend money.
The main difference between the expenditure approach and the income approach is their starting point. The expenditure approach begins with the money spent on goods and services. Conversely, the income approach starts with the income earned from the production of goods and services wages, rents, interest, profits. Both GNP and GDP attempt to track the value of goods and services produced in an economy, but they use different criteria for determining this value.
GNP tracks the total value of goods and services produced by all citizens of the U. It counts people who are living abroad, for example, and overseas investments.
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