What are the components of aggregate expenditure, and what is the composition of each?

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justaguide eNotes educator| Certified Educator

The standard definition of Aggregate Expenditure in Economics is the sum of the amount that is consumed, the amount that is invested, the amount of government spending and the net exports. Symbolically it can be expressed as AE = C + I + G + (Ex - Im).

Now consumption has two components, one that is constant and not related to the disposable income and another which is related to the disposable income, and determined by the product of disposable income and the marginal propensity to consume. Also, consumption can be purchase of non-durable goods, durable goods and services.

Investment can be broken into planned investment and unplanned investment.

Government spending is usually divided into government consumption, government investments and transfer payments. Aggregate expenditure does not include transfer payments, only the first two components.

Net exports is the amount spent in importing goods and services subtracted from the amount earned from exporting the same