Determinants of Aggregate Expenditure

Aggregate Expenditure 1
AGGREGATE EXPENDITURE
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Aggregate Expenditure 2
What are the main determinants of Aggregate Expenditure?
The main four determinants/components of the Aggregate Expenditure include household
consumption, investment, government spending and net exports.
Household Consumption is the total amount of money that people sped on commodities
over the period of the year. Household consumption include things like purchase of ball point
pens, toilet paper and couches. Generally consumption is the expenditure on consumer durable as
well as non-durable final goods. The determinants of Australian household consumption include
consumer confidence, level of disposal income, and level of discretionary income (income-tax +
interest), stock of personal wealth, fiscal policy and low inflationary expectations.
Investment is the amount of money individual and business invest on capital spending.
Investment include things like novel manufacturing machines, improvements in real estate as
well as purchases of buildings. The investment is the expenditure on capital goods by the private
and individuals firms including changes in the planned inventories. The determinants of
investment in Australia include business confidence, technological advancement, monetary
policy, government policy, profit levels, fiscal policy, and urbanization or industrialization
increases, demand for raw materials, requiring enormous capital expansion to meet demand.
Government expenditure: The total amount of money which the Australian government
is spending on both capital goods and current goods. Australian government spending will
determine the growth, employment and income. The determinants of Australian government
expenditure include government policy objectives as well as macroeconomic stability or the GFC
stimulus package.
Net exports: The net exports net export is determined by subtracting total Australian
import from total exports of Australia. It includes the Australian net external demand minus

Aggregate Expenditure 3
foreign expenditure on the Australia goods less spending on imports. This is the solely
component that is able to be a negative number. The net export will be negative if the imports is
greater than exports. Factors affecting net export in Australia include domestic and foreign
activity, tariffs, exchange rates as well as terms of trade.
Thus the AE is given by the formula:
AE=Aggregate Expenditure
C=Household consumption
I= Investment
G= Government spending
X= Net exports
The formula for AE is given by the basic addition problem:
AE=C+I+G+X
Alterations in such determinants subsequently trigger shifts of the AE line. The principle
of the effective demand that Keynes proposed as the significant theoretical variation between
Keynesian economics and the classical economic signals that the AE are mainly anchored on the
prevailing income and production levels. Where individuals have increased income, then they
remained inclined to spending more. Less income leads to the less expenditure.
How do changes in these components affect the level of income, employment and growth in
Australia?
The determinants of the AE affect the AE line much like any determinants affecting the
respective curvature-they trigger the curvature to shift. This can be illustrated by the diagram
below presenting the AE line, labelled AE. The AE determinants can cause either a surge or a
plunge in the AE.