Even
though Keynesian economics and demand-side economics are synonymous in the
economic literature, the Keynesian macroeconomic framework focused on the
concept of aggregate expenditure rather than aggregate demand. While the
aggregate demand curve relates desired consumption of newly produced goods and
services to the aggregate price level, the aggregate expenditure curve relates planned
expenditure on newly produced goods and services within the economy to the
level of real income. While the aggregate demand curve is the macro equivalent
of the individual’s (household’s) or the market demand curve for a product in
microeconomic theory, the aggregate expenditure curve is the macro
representation of the individual’s (household’s) Engel curve.More formally, the
aggregate expenditure curve shows the levels of planned expenditure on newly
produced goods and services in an economy at various levels of real national
income, all other factors, such as prices and wages, remaining constant.
though Keynesian economics and demand-side economics are synonymous in the
economic literature, the Keynesian macroeconomic framework focused on the
concept of aggregate expenditure rather than aggregate demand. While the
aggregate demand curve relates desired consumption of newly produced goods and
services to the aggregate price level, the aggregate expenditure curve relates planned
expenditure on newly produced goods and services within the economy to the
level of real income. While the aggregate demand curve is the macro equivalent
of the individual’s (household’s) or the market demand curve for a product in
microeconomic theory, the aggregate expenditure curve is the macro
representation of the individual’s (household’s) Engel curve.More formally, the
aggregate expenditure curve shows the levels of planned expenditure on newly
produced goods and services in an economy at various levels of real national
income, all other factors, such as prices and wages, remaining constant.
Unlike
the aggregate demand curve, the aggregate expenditure curve would be upward sloping,
showing that the higher the level of real income, the greater would be the
level of society’s planned expenditure on goods and services. Keynes adoption
of the aggregate expenditure curve was informed by his belief that output could
be increased significantly without generating any change in price once the
economy is below the full employment level. If price is constant, then we can
draw up a curve that shows how plan expenditure increases with increases in
income (while price remains constant). Such a curve is an aggregate expenditure
curve. Since aggregate expenditure is a measure of planned spending within an
economy, it would be dependent on the economy’s total output. From our study of
the circular flow of income in chapter four, we can state that
the aggregate demand curve, the aggregate expenditure curve would be upward sloping,
showing that the higher the level of real income, the greater would be the
level of society’s planned expenditure on goods and services. Keynes adoption
of the aggregate expenditure curve was informed by his belief that output could
be increased significantly without generating any change in price once the
economy is below the full employment level. If price is constant, then we can
draw up a curve that shows how plan expenditure increases with increases in
income (while price remains constant). Such a curve is an aggregate expenditure
curve. Since aggregate expenditure is a measure of planned spending within an
economy, it would be dependent on the economy’s total output. From our study of
the circular flow of income in chapter four, we can state that
AE
= C + I + G + (X – M)
= C + I + G + (X – M)
Where
C
= Planned consumption expenditures by households
= Planned consumption expenditures by households
I
= Planned investment expenditures by the business sector
= Planned investment expenditures by the business sector
G
= Planned Government expenditure; and
= Planned Government expenditure; and
X
– M = Planned expenditure on exports less imports.
– M = Planned expenditure on exports less imports.
Since
from our circular flow analysis, expenditure is equal to income and output we
can, in the first instance, draw a 45 line (labeled AS in Fig. 6-1) which shows
the equality between planned aggregate expenditure (represented on the vertical
axis) and real output (represented on the horizontal axis) for every level of
income. For example, when aggregate expenditure isN2, 500 million (point e in Fig. 6-1), real output or income is
also equal toN2, 500 million. Some
authors view this 45 line as the aggregate supply curve. This should be so
since the curve show that when income is zero, output, and hence, aggregate
expenditure is zero and the higher the income level, the greater the national
output and hence, the greater the aggregate expenditure.
from our circular flow analysis, expenditure is equal to income and output we
can, in the first instance, draw a 45 line (labeled AS in Fig. 6-1) which shows
the equality between planned aggregate expenditure (represented on the vertical
axis) and real output (represented on the horizontal axis) for every level of
income. For example, when aggregate expenditure is
also equal to
authors view this 45 line as the aggregate supply curve. This should be so
since the curve show that when income is zero, output, and hence, aggregate
expenditure is zero and the higher the income level, the greater the national
output and hence, the greater the aggregate expenditure.
Thus,
we have labeled the 45 line as AS, representing aggregate supply. The point of
equality of the aggregate expenditure and aggregate supply curve yield equilibrium
income (output) ofN2, 500m. Equilibrium
in this setting implies that the planned aggregate expenditure on newly produced
final goods and services is equal to the real national output (income). It will
be observed that the aggregate expenditure curve has a lower slope (rises at a
lower rate) than the aggregate supply curve. In the next part of this chapter,
we shall see the reason for this and also explore the effects of policy
–induced shifts in the aggregate expenditure curve on the equilibrium national
income. But first, we will take a closer look at the consumption and investment
components of aggregate expenditure and the role they play in the Keynesian
macroeconomic framework.
we have labeled the 45 line as AS, representing aggregate supply. The point of
equality of the aggregate expenditure and aggregate supply curve yield equilibrium
income (output) of
in this setting implies that the planned aggregate expenditure on newly produced
final goods and services is equal to the real national output (income). It will
be observed that the aggregate expenditure curve has a lower slope (rises at a
lower rate) than the aggregate supply curve. In the next part of this chapter,
we shall see the reason for this and also explore the effects of policy
–induced shifts in the aggregate expenditure curve on the equilibrium national
income. But first, we will take a closer look at the consumption and investment
components of aggregate expenditure and the role they play in the Keynesian
macroeconomic framework.
Keynes
adopted an aggregate expenditure curve which shows the level of planned
expenditure on newly produced goods and services at various levels of real
national income, prices remaining constant. The aggregate expenditure curve is
upward sloping showing that the higher the level of income, the greater the
level of planned expenditure. The 45 line, which can be regarded as the
aggregate supply (AS) curve, shows the equality between planned aggregate
expenditure and real output for every level of income.
adopted an aggregate expenditure curve which shows the level of planned
expenditure on newly produced goods and services at various levels of real
national income, prices remaining constant. The aggregate expenditure curve is
upward sloping showing that the higher the level of income, the greater the
level of planned expenditure. The 45 line, which can be regarded as the
aggregate supply (AS) curve, shows the equality between planned aggregate
expenditure and real output for every level of income.