In what ways do the components of aggregate expenditure affect the level of income, employment and growth in an economy?  

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The components of aggregate expenditure (and of GDP) are consumer spending, investment, and government spending.  The higher the values of these components, of course, the greater the level of income, employment, and growth in an economy.

However, we can go further than that and say that consumer spending is more important in the short term and investment is more important in the long term.  If there is low consumer spending (as in the US right now), employment, income and growth will be low in the short term.  If consumer spending is hight, these things will be high.  But even if consumer spending is high, this does not do much for long term prospects.  Instead, investment is what is important.  Assuming that it is done wisely, investment allows for economic growth.  It increases the potential level of aggregate supply by increasing the amounts of capital goods that exist in the economy.  Investment makes it possible for growth to happen in the future even though it does not do as much for employment and income in the near term.

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