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Aggregate Expenditure Model & Formula

Sarah Sagal, Adam Gifford
  • Author
    Sarah Sagal

    Sarah has a Master’s in Business Administration focused in Business Analytics from Frostburg State University as well as a Bachelor’s in Business Administration with minor in Entrepreneurship and Economics, also from Frostburg State University. She has three years of professional experience in a higher education environment.

  • Instructor
    Adam Gifford

    Adam holds an MBA and a MS in Human Resources

Learn about aggregate expenditure. Understand its significance and how to calculate aggregate expenditure. Learn about the components of aggregate expenditure. Updated: 04/25/2022

Aggregate Expenditure Model

Aggregate expenditure is defined as the value of all finished goods and services at a given time within an economy. This model is one that economists might use to determine the gross domestic product, or GDP, of an economy. GDP is the total output within an economy over a given time period; it is usually calculated within the context of a year. Since aggregate expenditure can be used to calculate GDP, it allows countries to measure the size of their economies and the growth over time.

Planned expenditure is the value of the total amount of finished goods and services within an economy that are intended to be sold. Actual expenditure is the value of finished goods and services that actually sell, and the amount of inventory investment is the difference between the two. If planned expenditure was always met, every product produced would always be sold. Since this is not the case, the leftover goods are considered an investment in inventory.

Aggregate Expenditure

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.

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Aggregate Expenditure Formula

The calculation of aggregate expenditure is found by summing consumption (C), investment (I), government expenditure (G), and net exports (X-M), as shown below. Each of these components will be discussed in further detail.

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

Consumption

Consumption is total household consumption over a given period of time. This includes all households within a country, and all expenditures by each of those households.

Investment

Investment is the amount of money spent on capital good investments, such as factories, properties, and equipment. This is almost always done by businesses.

Government Expenditure

Government expenditure is the total amount of spending done by local, states, and federal governments within a given period of time. Anything the government decides to spend money on falls in this category.

Net Exports

Net exports is found by subtracting the total imports (M) from the total exports (X). This shows the total amount of goods brought into the economy less the total amount of goods taken out of the country.

Aggregate Expenditure Graph

Aggregate expenditure and aggregate supply constantly work with each other to try to reach a state of equilibrium, where aggregate expenditure is equal to aggregate supply. When aggregate supply is larger than aggregate expenditure, prices will decrease or the quantity produced will decrease to meet aggregate expenditure, resulting in an overall decrease to GDP. When aggregate expenditure is greater than aggregate supply, prices and/or output will increase to meet aggregate expenditure, resulting in a higher GDP. Though these two are tied, they are not often graphed together. Rather, the aggregate expenditures curve is graphed against a 45 degree line which shows all combinations where real GDP is equal to aggregate expenditures, which is where the point of equilibrium is achieved.

Remember, equilibrium is where there is no shortage or surplus of finished goods and services; rather, every good and service produced is purchased at the point of equilibrium. As you can see in the accompanying graph, equilibrium is reached where real GDP and aggregate expenditures equal approximately 3.5. If aggregate expenditures fall to the left of this point, there is an unplanned decrease in inventories; if to the right, there is an unplanned increase.


Aggregate expenditure model

Image showing the intersection of aggregate expenditures with that of economic equilibrium


How to Calculate Aggregate Expenditure

Using the aggregate expenditure formula, the following example can be used to find aggregate expenditure.

Say country A has household consumption levels of $1000, investment levels of $1,500, government expenditure levels of $2000, exports equal to $5000 and imports equal to $3000. To find aggregate expenditure for country A, the following formula can be used:

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

AE = $1000 + $1,500 + $2,000 + ($5,000 - $3,000)

AE = $6,500

In country A, aggregate expenditure is $6,500. This means that real GDP is also equal to $6,500.

Four Different Components

You're probably thinking that the aggregate expenditure must be an awful lot of stuff. You're 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 ballpoint 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's 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.

Aggregate Expenditure Calculation

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

Plugging in, we get:

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

So we get:

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

So, finally, we have 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

So we have:

AE = C + I + G + X

Plugging in our values, we get:

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

This simplifies to:

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Video Transcript

Aggregate Expenditure

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.

Four Different Components

You're probably thinking that the aggregate expenditure must be an awful lot of stuff. You're 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 ballpoint 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's 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.

Aggregate Expenditure Calculation

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

Plugging in, we get:

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

So we get:

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

So, finally, we have 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

So we have:

AE = C + I + G + X

Plugging in our values, we get:

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

This simplifies to:

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Frequently Asked Questions

How do you calculate the aggregate expenditure model?

Aggregate expenditure is calculated by adding household consumption (C), investment (I), government expenditure (G), and net exports together.

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

Net exports is equal to total exports minus total imports.

What are the four components of aggregate expenditures?

The four components of aggregate expenditure are total household consumption within an economy (C), total capital investment within an economy (I), total government spending (G), and net exports, which is equal to total exports minus total imports. X is total exports and M is total imports.

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

What causes aggregate expenditure shift?

Price level changes are the main factor that causes aggregate expenditure to shift. Price impacts purchasing power, the interest rate, and the level of net exports, all of which play into the calculation of aggregate expenditure.

What is the aggregate expenditure model?

The aggregate expenditure model is a graphical representation of aggregate expenditure, or the total value of all finished goods and services within an economy. It is graphed against a 45 degree line which shows all combinations of equilibrium within the economy. The point where the aggregate expenditure curve crosses the 45 degree line is the point of equilibrium where aggregate expenditures equal real GDP.

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