Aggregate Expenditure - Components of AE

Components of AE

Various school of thoughts use various components to come up with the Aggregate Expenditure. The major school of economic thoughts which are the classical and Keynesian economists use the following components:

• Consumption expenditure (C)

Consumption refers to the household consumption over a given period of time. The total household consumption can be divided into two parts, they are: Autonomous Consumption and Induced consumption. Autonomous Consumption refers to the amount of consumption regardless of the amount of income, hence, even if the income is zero, the autonomous consumption would be the total consumption. Induced consumption refers to the level of consumption dependent on the level of income.

• C_a = Autonomous Consumption
• MPC = Marginal Propensity to Consume
• Y = Income

• Investment (I)

Investment is the amount of expenditure towards the capital goods. Investment refers to the expenditure towards goods that are expected to yield a return or increase their own value over time. The investment expenditure can be further divided into two parts, planned investment and unplanned investment. Over the long run the sum of differences in the unplanned investment would equal to zero as economy approaches equilibrium.

• Government Expenditure:(G)

The Keynesian model propagates an active state to control and regulate the economy. The government can make expenditure in terms of infrastructure or through transfers and thus increase the total expenditure in the economy as advocated by Keynes.

• Net Exports:(NX)

In an open economy, the total expenditure of the economy also includes the components of the net exports which is the total exports minus the total imports.