aggregate income vs aggregate expenditure

At Y1, AE > Y Since E is the only point on the AE line also on the 45° line, it is the only point at which output and planned expenditure are equal. We can also find equilibrium output using the consumption function (Equation 6.2), the investment function (Equation 6.4), the export function (Equation 6.5), the import function (Equation 6.6), and the equilibrium condition Y =AE. The aggregate expenditure function (AE) is the sum of planned induced expenditure and planned autonomous expenditure. Indeed investment expenditures have declined in 2015 and 2016. Aggregate income refers to the total amount of all income earned in an economy within a given period of time. Autonomous expenditure (A) is planned expenditure that is not determined by current income. Figure 6.6 shows this aggregate expenditure function with a positive intercept on the vertical axis and positive slope. Note that this fall in inventories is unplanned. The 45° line gives Y = AE the equilibrium condition. Business capacity to produce goods and services depends on the numbers and sizes of factories and machinery they operate and the technology embodied in that capital. aggregate construction approach, please refer to Carletto, et al (2007), “Rural Income Generating Activities Study: Methodological note on the construction of income aggregate… This positive intercept and slope less than 1 means that the AE line crosses the 45° line at E. On the 45° line, the value of output (and income) on the horizontal axis equals the value of expenditure on the vertical axis, as required by the national accounts framework. The expenditure basis measures the amount of money spent within a … At point E the AE line When output is above the equilibrium level, firms reduce output. In general terms, when the economy is producing more than current aggregate expenditure, unwanted inventories build up and output is cut back. Exports (X), like investment, can be a volatile component of aggregate expenditure. A financial crisis like that in the US in 2008 or the ongoing sovereign debt crisis in Europe shifts the AE line down. Copyright 2020 Leaf Group Ltd. / Leaf Group Media, All Rights Reserved. The economy is in recession and by our current assumptions neither price flexibility nor government policy action can affect these conditions. The marginal propensity to consume (mpc=c) defines this link between changes in income and the changes in consumption they induce. It shows constant autonomous expenditure at each level of GDP, induced expenditure changing as GDP changes and aggregate expenditure as the sum of autonomous and induced expenditure at each level of GDP. It covers the important changes in expenditure that drive the business cycles in economic activity. The slope measures induced expenditure. Sometimes output is high and rising; sometimes it is high and falling. The 45° line labeled \(Y = \text{AE}\), illustrates the equilibrium condition. It is determined instead by a wide range of economic, financial, external and psychological conditions that affect decisions to make expenditures on current output. Unplanned changes in business inventories cause adjustments in output that move the economy to equilibrium output. You can see how changes in investment and exports were much larger than those in consumption. Changes in economic conditions in other countries, changes in tastes and preferences across countries, changes in trade policies, and the emergence of new national competitors in world markets all impact on the demand for domestic exports.

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