There are two sides to any transaction. There is a seller, and there is a buyer. To use an example, when you enter a store to purchase something, you are the buyer. The store, or its owner, is the seller. For instance, if you purchase a soft drink for $2.00, you have expended—or spent—$2.00, and in exchange, you have received a soft drink to consume.
Aggregate expenditure measures the aggregate spending activities of the overall economy. Aggregate expenditure, or Gross Domestic Product (GDP), consists of household consumption, which is denoted by “C,” plus investments, denoted by “I,” plus government spending (“G”), plus net exports (“NX”).
Aggregate expenditure = C + I + G + NX.
It calculates the total value of economic activities within the country's economy and is also called gross domestic product (GDP).
Household consumption is the amount that people or the general population spends. In the example above where you purchased a soft drink, you contributed to household consumption.
Investment is the amount that the economy saves. If, for example, you earn $100 each week and spend $80, with the remaining $20 deposited in your savings account, you have contributed $20 to the country's I or gross investment.
G equals the amount that the government spends which is earmarked for many expenditures, including maintaining the country's infrastructure and providing law enforcement, among other activities.
Net exports (or imports) are the difference between total imports and total exports. In other words, if the country purchases $100 of goods from foreign countries and also sells $80 of internally produced products in international markets, then the net value is $20 of imported product. Conversely, if the country sells $100 in international markets and purchases $80, it is a net exporter of $20 worth of goods.
According to classical and Keynesian economic models, there are four main components of aggregate expenditure which are used to calculate a country's gross domestic product. These are consumption, investment, government spending, and net exports. In some models, income is also one of the components. When all these components are added together, we have the total GDP of a country. Let's look at each of these components below.
Consumption refers to the total amount of household consumption over a particular period of time. In other words, it is how much are people buying at the individual consumer level.
Investment is the amount of money that has been invested, both intentionally and unintentionally, on capital goods with the hope of receiving a return on investment.
Government spending is the amount of capital the government spends on infrastructure and other projects. This does not include pension programs and debt payments, as that would lead to a double count.
Net export refers to the spending on exports minus earnings on imports.
Some models also include income, or the amount of money that individuals earn through wages and certain investments. However, including income can lead to a double count, as certain income categories can also fall into the above categories.
Aggregate expenditures are used to calculate overall GDP for a nation, so they are interested in the various types of economic activity in that country. There are four separate components that make up aggregate expenditure.
Consumer spending is traditional spending in consumer stores and on products in the marketplace, and this makes up the largest portion of aggregate expenditures.
Business investment is a portion of aggregate expenditures, but only as long as it is on actual capital projects, because these contribute to the GDP of the nation.
Government purchasing is a component of aggregate expenditures so long as they are a specific type of spending. Paying off debt or foreign aid is not included in the calculation, nor is invested money for things like social security, but payments to government employees are counted.
Finally, net exports are included, but this encompasses the value of imports, which is subtracted from the value of all exports to ensure that one is accounting for money coming into the nation only.
Aggregate expenditure is a method of measuring the economy of a country. The components that are used to make this assessment include government spending, household consumption, net exports, and investment.
Household consumption is the total annual amount that consumers spend on goods and services. This includes groceries, household products, clothing, furniture, and other items both small and large.
Government spending includes the money spent by the national government.
To determine net exports, economists subtract a country's total imports from total exports. If exports are greater than imports, the number is positive, but if imports are greater than exports, the number is negative.
Investments comprise the total amount of money that individuals and businesses invest on capital expenditures.
After obtaining values for each of these components, economists use a mathematical formula to calculate aggregate expenditure. The formula consists of very simple addition: Aggregate expenditure = household consumption + government spending + net exports + investments. This total of a government's economic activity is also known as the gross domestic product of a country.
There are four components to aggregate expenditures. These components are used to calculate gross domestic product.
The four components are consumer spending, investment on the part of businesses, government purchases, and net exports.
- Consumer spending makes up the largest part of aggregate expenditures in countries such as the United States. This includes all final goods and services that consumers buy.
- Business investment refers to spending on capital goods. When businesses buy things like new equipment, that counts as investment.
- Government purchases are not the same thing as total government spending. The government spends on things like paying interest on the national debt and on transfer payments such as welfare and unemployment insurance. These payments do not count as government purchases. This component of aggregate expenditures only counts government spending on new goods and services. So, when the government pays a teacher that money is counted, but a Social Security check to a retired teacher does not count.
- Net exports are found by subtracting the dollar value of imports from the dollar value of exports.
Together, these four components make up aggregate expenditures and are used to calculate GDP.