[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Chapter 30
AGGREGATE
EXPENDITURES AND
INCOME
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In Chapter 29, we learned that recessions and booms can result from shifts in
the demand for the goods and services that the economy produces. When
demand falls, firms scale back production and need fewer workers—current
employees are laid off and few new ones are hired. Wages and prices fail to adjust
quickly enough to ensure that the economy remains at full employment, and the
unemployment rate rises. When demand increases, firms expand production and
the economy expands—employment increases and the unemployment rate falls.
The task of this chapter is explaining the relationship between equilibrium output
and aggregate expenditures, the name economists give to the overall demand for what
the economy produces. Aggregate expenditures are the total spending by households,
firms, government, and the foreign sector on the goods and services produced. There
is a feedback relationship between spending and income—changes in spending affect
the equilibrium level of production and income, and changes in income influence
spending. Understanding the connection between aggregate expenditures and income
is important. Shifts in aggregate expenditures, increased pessimism among households
that results in a drop in consumption spending, and the introduction of new technologies
that lead to increased investment spending by firms are important causes of
economic fluctuations. We will also discuss the major factors that affect the three
components of private expenditures: consumption, investment, and net exports.
Income–Expenditure Analysis
Aggregate expenditure has four components: consumption, investment, government
purchases, and net exports. 1 We can think of aggregate expenditures as the
1 Since our objective is to explain real GDP and employment, our focus continues to be on real consumption,
real investment, real government purchases, and real net exports.
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