micro economics chapter 11

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11
The Aggregate
Expenditures Model

McGraw-Hill/Irwin

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Assumptions and Simplifications

• Not at full-employment
• Prices are fixed
• GDP = DI
• Begin with private, closed economy
• No government
• No trade

LO1

Investment Schedule (Ig)

• Shows the amount that businesses
•

LO1

plan to invest at different levels of
GDP
Assume investment (Ig) is

independent of GDP => investment is
constant at all GDP levels

Leakages/Injections

• Leakages – Income not used to buy
•

•
LO1

domestically produced goods and
services
Injections – Spending in addition to
consumption expenditures on
domestically produced goods and
services
GDP, output, income are the same

Aggregate Expenditures

• Aggregate expenditures = total
•
•

LO1

spending

Economic speak
The amount of goods and services
produced and therefore the level of
employment depend directly on the
level of aggregate expenditures

Equilibrium GDP
TABLE 28.2 Determination of the Equilibrium Levels of Employment, Output, and Income: A Private Closed Economy
(2)
Real
Domestic
Output
(and
Income)
(GDP =
DI),*Billio
ns

(3)
Consumption
(C),
Billions

(4)
Saving
(S),
Billions

(5)

Investment
(Ig),
Billions

(6)
Aggregate
Expenditure
(C+Ig),
Billions

(7)
Unplanned
Changes in
Inventories,
(+ or -)

(1) 40

$370

$375

$-5

$20

$395

$-25

Increase

(2) 45

390

390

0

20

410

-20

Increase

(3) 50

410

405

5

20

425

-15

Increase

(4) 55

430

420

10

20

440

-10

Increase

(5) 60

450

435

15

20

455

-5

Increase

(6) 65

470

450

20

20

470

0

Equilibrium

(7) 70

490

465

25

20

485

+5

Decrease

(8) 75

510

480

30

20

500

+10

Decrease

(9) 80

530

495

35

20

515

+15

Decrease

(10) 85

550

510

40

20

530

+20

Decrease

(1)
Possible
Levels of
Employment,

Millions

(8)
Tendency of
Employment,
Output, and
Income

* If depreciation and net foreign factor income are zero, government is ignored and it is assumed that all saving occurs in the household sector of the
economy, then GDP as a measure of domestic output is equal to NI,PI, and DI. Household income = GDP

LO1

Planned vs. Actual Investment

• Actual investment includes planned
•

LO4

investment (Ig) and unplanned
changes in inventories.
As a result, actual investment equals
savings at all GDP levels.

Multiplier Effect

• A change in spending changes real

GDP more than the initial change in
spending
Multiplier =

change in real GDP
initial change in spending

Change in GDP = multiplier x initial change in spending

LO4

Multiplier & Marginal Propensities

• Multiplier and MPC directly related
• Multiplier and MPS inversely related
Multiplier =

LO4

1
1- MPC

Multiplier =

1
MPS

Adding International Trade

• Include net exports spending in
aggregate expenditures
• Private, open economy
Xn can be positive or negative

•
• Net exports are independent of GDP
=> net exports are constant at all
GDP levels
LO4

Adding the Public Sector

• Government purchases do not impact
•
•

LO4

private spending
Taxes are personal
Lump sum tax

Government Purchases and Eq.
GDP

TABLE 28.4 The Impact of Government Purchases on Equilibrium GDP

(1)
Real
Domestic
Output and
Income
(GDP=DI),
Billions

(5)
Net Exports
(Xn), Billions
Imports
(M)

(6)
Government
Purchases
(G), Billions

(7)
Aggregate
Expenditures
(C+Ig+Xn+G),
Billions
(2)+(4)+(5)+(6)

$10

$10

$20

$415

20

10

10

20

430

5

20

10

10

20

445

420

10

20

10

10

20

460

(5) 450

435

15

20

10

10

20

475

(6) 470

450

20

20

10

10

20

490

(7) 490

465

25

20

10

10

20

505

(8) 510

480

30

20

10

10

20

520

(9) 530

495

35

20

10

10

20

535

(10) 550

510

40

20

10

10

20

550

(3)
Saving (S),
Billions

(4)
Investment
(Ig),
Billions

Exports
(X)

$375

$-5

$20

(2) 390

390

0

(3) 410

405

(4) 430

(2)
Consumption
(C),
Billions

(1) $370

LO4

Taxation and Equilibrium GDP
TABLE 28.5 Determination of the Equilibrium Levels of Employment, Output, and Income: Private and Public Sectors

(1)

Real
Domestic
Output
and
Income
(GDP),
Billions

(7)
Net Exports
(Xn), Billions

(9)
Aggregate
Expenditures (Ca
+Ig+Xn
+G),
Billions
(4)+(6)+(7)
+(8)

(2)
Taxes
(T),
Billions

(3)
Disposable
Income
(DI),

Billions,
(1)-(2)

(4)
Consumption (Ca),
Billions

(5)
Saving
(Sa),
Billions

(6)
Investment (Ig),
Billions

Export
s
(X)

Import
s
(M)

(8)
Government
Purchases
(G),
Billions