Aggregate expenditure

What is the aggregate expenditure model also known as?

Keynesian expenditure model

What is aggregate expenditure?

The sum of all expenditure on final goods and services undertaken in the economy during a specific time period.

What does the aggregate expenditure consist of?

Consumption (household expenditure on final goods and services)

Planned investment (spending on capital equipment and construction)

Government spending on goods and services

Net exports

What is the equation of aggregate expenditure?

AE = C + I + G + (X - M)

Is aggregate expenditure (AE) equal to gross domestic product GDP?

The one way to measure the value of GDP is the expenditure method.

GDP equals the sum of the four expenditure categories when the economy is in equilibrium.

What are inventories?

Inventories are unsold goods, the value of inventories is included as part of actual investment when calculating GDP, but they are not included in planned investment.

What is the equation of actual investment?

Actual investment = planned investment + change in inventories

What is the largest component of aggregate expenditure?

Consumption - household expenditure on goods and services

What are the components of consumption?

expenditure on non-durable goods

expenditure on durable goods

expenditure on services

What are non-durable goods?

These are goods consumed immediately (or within three years) and include spending on food, fuel and clothing, typically accounting for about 35% of total consumption.

What is the spending on non-durable goods?

This spending is regarded as essential or non-discretionary and it is fairly stable over time.

What are durable goods?

Goods that last for a longer period of time (three or more years). Durable goods include appliances, sporting equipment and motor vehicles. Approximately 15% of total consumption.

What is the spending on durable goods?

Discretionary meaning it can be postponed, depending on the individual household’s circumstances.

What is the largest category of consumption?

Services accounting for around 50%, such as education, transport, health and household utilities. Accounts for between 50-58% of GDP with an average of 55%.

What is the spending on services?

Some are essential like education and health while others are discretionary such as spending on entertainment and leisure.

What is the second component of aggregate expenditure?

Private investment which tends to be the most volatile component of AE.

What are the trends in investment?

Over the last 25 years, private investment has fluctuated between 16% and 24% of Australia’s GDP with an average value of 21%.

What is the third component of aggregate expenditure?

Government purchases do not include government spending on welfare, such as unemployment benefits or pensions. Government purchases consist of two categories. Accounts for 24% of GDP.

What are the two categories of government purchases?

capital purchases (G1)

capital purchases (G2)

What are current purchases?

Finances the day-to-day business of the government such as wages, salaries, purchases of goods and services for the government departments including education and health.

What are capital purchases?

Investment spending on public infrastructure such as power and water supply, schools and roads.

What is the fourth component of AE?

Net exports. Foreign purchases of goods and services produced in Australia are exports in Australia’s national accounts and add to aggregate expenditure.

When do imports occur?

When Australian households, firms and governments purchase goods and services from overseas.

Are imports leakages or injections?

Imports are a leakage from the circular flow of income and are subtracted from aggregate expenditure.

What is the trend in consumption?

Consumption as a proportion of aggregate expenditure has fallen since 2016. This was exacerbated by the Covid pandemic, when shutdowns affected normal buying patterns and household savings increased.

Trend in net exports

Since 2018, net exports have been positive, and at record levels - up to 6% GDP. This was due to record commodity prices boosting the value of Australia’s mineral and energy exports.

Trend in government spending

Government spending has increased quite substantially since 2016.