Aggregate Expenditure: Definition, Function, Components & Formula

Instructor: Adam Gifford

Adam holds an MBA and a MS in Human Resources

In this lesson, we'll start by defining the concept of aggregate expenditure. Then we'll discuss its components and the formula used to calculate it, and look into how aggregate expenditure can be used to analyze the economy of a country.

Measuring How Much Money a Country Spends

Most people track how much money they spend over the course of a year so that they can accurately budget their income. The economy of a country can be tracked in the same way. Much to the delight of economists, there are a number of different ways that a country can measure its economy. One of the most popular methods is to determine the aggregate expenditure of the country. The aggregate expenditure is defined as the value of all of the completed goods and services that currently exist in a country.

That Is a Lot of Stuff to Measure

You are probably thinking that the aggregate expenditure must be an awful lot of stuff. You are definitely correct in thinking that. We'll make that number a bit easier to comprehend by looking at the different components that make up the total. Aggregate expenditure is made up of four components:

  1. Household consumption: This is the total amount of money that individuals spend on goods and services over the course of a year, including things like the purchases of couches, toilet paper and ball point pens.
  2. Investment: This is the amount of money that people and businesses invest on capital expenditures. These are things like new manufacturing machines, improvements to real estate and purchases of buildings.
  3. Government spending: This is the total amount of money that is spent by the government.
  4. Net exports: This is determined by subtracting the total imports of a country from the total exports. This is the only component that can be a negative number. It will be a negative number if imports are greater than exports.

How to Calculate Aggregate Expenditure

Once you have determined the value for each of the components, you are ready to calculate the total amount by using the formula for aggregate expenditure. First we will establish some abbreviations so the formula will be easier to follow:

  • AE = Aggregate expenditure
  • C= Household consumption
  • I = Investment
  • G = Government spending
  • X = Net exports

The formula is then a basic addition problem:

AE = C + I + G + X

Here are some of the component totals for the fictitious country of New Oldenstan:

  • Household consumption = $100,000
  • Investment = $250,000
  • Government spending = $500,000
  • Exports = $300,000
  • Imports = $150,000

Now we can plug this data into the formula. Remember that net exports are just exports minus imports, or X = exports - imports.

AE = C + I + G + X

AE = $100,000 + $250,000 + $500,000 + ($300,000 - $150,000)

AE = $100,000 + $250,000 + $500,000 + $150,000

AE = $1,000,000

The total aggregate expenditure for New Oldenstan is $1,000,000.

Now lets see what happens when there is a negative net export. We'll solve for some new data from New Oldenstan:

  • Household consumption = $150,000
  • Investment = $200,000
  • Government spending = $600,000
  • Exports = $300,000
  • Imports = $400,000

AE = C + I + G + X

AE = $150,000 + $200,000 + $600,000 + ($300,000 - $400,000)

AE = $150,000 + $200,000 + $600,000 - $100,000

AE = $850,000

The only real difference here is that net exports are subtracted rather than added. Why is that? Because net exports are negative if imports are greater than exports.

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