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Chapter 23: Problem 5

What is the difference between aggregate expenditure and consumption spending?

Short Answer

Expert verified
The difference between aggregate expenditure and consumption spending lies in their scope. Aggregate expenditure is the total spending in the economy, including consumption spending, investment, government spending, and net exports, while consumption spending merely refers to the total amount that households spend on consumer goods and services.

Step by step solution

01

Define Aggregate Expenditure

The aggregate expenditure refers to the total spending in an economy for all final goods and services during a particular period. It includes Consumption spending, Investment spending, Government spending, and Net Exports (Exports - Imports). In the equation form, it can be written as: \[ AE = C + I + G + (X - M) \], where C is consumption expenditure, I is investment expenditure, G is government expenditure, X is exports and M is imports.
02

Define Consumption Spending

Consumption spending, on the other hand, refers to the total amount that households spend on consumer goods and services within a given period in an economy.
03

Clarify the Difference

The difference between the two concepts lies in their scope. Consumption expenditure is a part of the aggregate expenditure, the latter also including additional aspects such as government spending, investments, and net exports. Therefore, while consumption spending gives a picture of household spending in the economy, aggregate expenditure provides a broader picture of the overall spending in an economy.

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Most popular questions from this chapter

An article in the Wall Street Journal stated that at the beginning of May \(2017,\) inventories of pickup trucks were "touching 97 days' supply as of the beginning of May, or a \(12 \%\) increase in actual vehicles on dealer lots compared with the prior year.... That number is far above the industry norm for inventory." Why might U.S. automakers find that their inventories of pickup trucks are unexpectedly rising? How are these automakers likely to react to the increase in inventories?

What are the four main determinants of investment? How would a change in interest rates affect investment?

An article in the Wall Street Journal on the housing market stated, "Steady job growth, rising wages and low interest rates have helped prop up housing demand." Why do low interest rates increase the demand for housing? In which component of aggregate expenditure does the Bureau of Economic Analysis include purchases of new houses?

Unemployed workers receive unemployment insurance payments from the government. Does the existence of unemployment insurance make it likely that consumption will fluctuate more or less over the business cycle than it would in the absence of unemployment insurance? Briefly explain.

Suppose that exports become more sensitive to changes in the price level in the United States. That is, when the price level in the United States rises, exports decline by more than they previously did. Will this change make the aggregate demand curve steeper or less steep? Briefly explain.
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