Aggregate Expenditures

• Y = AE = C + I + G + X

– Consumption (C)
– Investment (I)
– Government (G)
– Net exports (X)

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Expenditures as a Percent of GDP

70%
60%
50%
Consumption
40%
Investment
30%
Government
20%
Net Exports
10%
0%
-10%

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 Consumption and Saving
• Disposable income = consumption + saving
• Yd = C + S
• Saving occurs over a unit of time; it is a flow
concept.
• Savings are an amount accumulated at a point
in time; they are a stock concept.

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Consumption and Disposable Income

4
Consumption Function

5
Saving Function

6
 Dissaving
• Spending more than earned income results in
a need to borrow or use savings. This is called
dissaving.

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 Dissaving and Credit Cards
 There were 26.5 billion
credit card transactions in
2008, totaling $2.1 trillion,
as compared to 21 billion
transactions and $1.4
trillion in 2003.

 The average outstanding

debt for households that
have a credit card was
$10,679 at the end of 2008.

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 Autonomous Consumption
• Consumption that is independent of income is
called autonomous consumption.

• Expenses for food and shelter fall under the

category of autonomous consumption.

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Marginal Propensityto Consume and Save

• MPC = Change in consumption ÷ change in

disposable income

• MPS = Change in saving ÷ change in

disposable income

• MPC + MPS = 1

10
MPC and mps

11
Marginal Propensity to Consume

12
Marginal Propensity Save

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Average Propensity to Consume and Save

• APC = consumption ÷ disposable income

• APS = saving ÷ disposable income

• APC + APS = 1

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Apc and aps

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 Determinants of Consumption
 Disposable Income
 Household income is the primary determinant of consumption
 Wealth
 An increase in wealth raises current consumption and lowers
current saving.
 Expectations
 The Consumer Confidence Index, is a measure of consumer
opinion regarding the expectations for the economy
 Demographics
 Other things being equal, economists expect the level of
consumption to rise with increases in population.
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Autonomous Shifts in Consumption and in Saving

17
 Investment
• We assume that investment is autonomous
and independent of current real GDP.

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 Determinants of Investment
 Interest Rate
 Capital expenditures (investment) are usually financed. They
should be sensitive to the cost of financing—the interest rate.
Return on investment = profit ÷ cost.
 Profit Expectations
 Decision makers compare the financing costs to the expected
returns from the new capital. If they compare favorably, they
invest.
 Technological Change
 Cost of Capital Goods
 Capacity Utilization
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Capacity Utilization Rates for Total U.S. industry

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 Volatility in Investments
 Interest rates fluctuate widely.
 Expectations can change suddenly with new
information.
 Technological change proceeds unevenly, making
it difficult to forecast.
 Changes in tax policy create large incentives to
invest or not to invest.
 Investment generally rises and falls with the rate
of capacity utilization over the business cycle.
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Government Expenditures as a Function of Real GDP

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 Net Exports
 Net exports = a country’s exports of goods and
services - its imports of goods and services

 When net exports are positive, there is a surplus,

when net exports are negative, there is a deficit.

 The United States has had a net exports deficit

since 1975.

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 Exports
• Many factors determine the actual value of
exports, among them foreign income, tastes,
prices, government trade restrictions, and
exchange rates.

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 Imports
• Value of imports is also determined by tastes,
trade restrictions, and exchange rates as well
as domestic income.

• The greater domestic real GDP, the greater

domestic imports. This is measured by
marginal propensity to import (MPI).

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net Exports as a Function of Real GDP

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The Aggregate Expenditures Function

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