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:
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.
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.
Government spending: This is the total amount of money that is spent by the government.
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.
Imagine that you are on a diet and are trying to lose 20 pounds. You get on the scale one day and it reads 150 pounds. Are you on target for your weight loss? How much have you lost so far? Looking at your weight on a single day means nothing because it doesn't answer either of those two questions. You can only track your progress by looking at your historical weight measurements and comparing them with your current weight measurement. The data for aggregate expenditure is similar in terms of analysis.
The totals for aggregate expenditures in industrialized countries are typically in the billions of dollars and sometimes even in the trillions of dollars. Those are some really big numbers! So what can you infer from one of those huge numbers? The answer is, unfortunately, not much. The importance of the numbers comes when you compare them to numbers from previous dates. You can then see if the economy of the country grew or shrank. You can also see if the economy grew (or shrank) more or less than was predicted, and you can compare many years of data to see trends in a country's economy.
Aggregate expenditure is defined as the value of all of the completed goods and services that currently exist in a country. It is determined by calculating the sum of household consumption, investment, government spending and net exports. In order to determine net exports you subtract total imports from total exports. This is the only component that can be a negative number. Once you have determined the aggregate expenditure for a particular country you can then analyze the country's economy by comparing the current data to historical aggregate expenditures.
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