Determinants of Aggregate Expenditure

• Purpose

  Measure economic activity
• 3 ways to measure GDP

  • Expenditure approach
  • National Income approach
  • Output approach
• Equilibrium: Sum of all output (O) = sum of all Expenditure (E) = sum of all income (Y)
• Expenditure Approach

  Total amount that firms, households and government plan to spend on final goods and services at each level of the economy
• Components of aggregate expenditure

  • Consumption Expenditure (C)
  • Private Investment Expenditure (I)
  • Government Expenditure (G)
  • Net Exports (X-M)
• Consumption Expenditure (C)

  Household expenditure on durable goods, non-durable goods and services
• Types of consumption expenditure

  • Durable (>3 years)
  • Non-durable (<3 years)
  • Services (Non-commodity items)
  • Autonomous (Needed for survival)
  • Discretionary (Wants)
• Factors affecting consumption expenditure

  • Disposable income
  • Interest rate
  • Availability of credit
  • Stock of personal wealth
  • Expectations
  • Government policies
• Private Investment Expenditure (I)

  Expenditure on producer or capital goods that are used to produce final goods and services in the future
• Types of private investment expenditure

  • Planned investment (Fixed investment, Residential fixed investment)
  • Changes in business inventories
• Factors affecting private investment expenditure

  • Rates of interest
  • Business expectations
  • Level of past profits
  • Government policies
• Government Expenditure (G)


  Includes all federal, state, local government policy
• Types of government expenditure

  • G1: Current government expenditure on day to day functions
  • G2: Government expenditure used for future needs
• Factors affecting government expenditure

  • Government policy objectives
  • Current economic climate
• Net Exports (X-M)


  Value of exports minus value of imports
• Factors affecting net exports

  • Exchange rate
  • Domestic and overseas economic activity
  • Tariffs/Quotas