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

ical questions. First, why does the aggregate expenditures schedule have a positive
slope and what determines that slope? And second, what factors lead to shifts in the
aggregate expenditures schedule?
To address these questions, we will take a brief look at each of the four components
of aggregate spending: (1) consumption: purchases by households of goods
and services, such as food, television sets, and clothes; (2) investment: purchases of
capital goods, machinery, and buildings by firms to help them produce goods and
services; (3) government purchases, both of goods and services bought for current
use (government consumption) and of goods and services such as buildings and
roads bought for the future benefits they produce (public investment); and (4) net
exports. We say net exports, because to determine the total purchases of goods and
services produced domestically (and therefore included in GDP), we must subtract
from the value of goods sold abroad (exports) the value of the goods and services
purchased by U.S. households, businesses, and the government that were produced
abroad (imports).
Consumption
Consumption is by far the largest component of aggregate expenditures. In the
United States, consumer expenditures represent about two-thirds of total expenditures.
Three factors are of primary importance in determining consumption. These
are disposable income, expectations about future income, and wealth.
DISPOSABLE INCOME
Figure 30.3 shows real consumption and real GDP in the United States since 1960.
The figure, in addition to illustrating that consumption is a large fraction of GDP,
also reveals that the two tend to move together. That should not be surprising.
Though GDP represents the economy’s total output, national output is also equal to
national income—and income is the most important determinant of consumption.
On average, families with higher incomes spend more.
The measure of income most pertinent to household consumption is disposable
income, the income of households after taxes are paid. Figure 30.4 plots aggregate
real consumption against aggregate real disposable income for the United States
from 1960 to 2002; the close relationship is quite obvious. As disposable income goes
up, consumption rises; as disposable income falls, consumption falls.
The Marginal Propensity to Consume The amount by which consumption
changes as income changes is called the marginal propensity to consume, or
MPC. For example, if a household’s disposable income rises by $2,000 per year and
its consumption spending rises by $1,600 per year, the marginal propensity to consume
is found by taking the change in consumption and dividing it by the change in
income, or 1,600/2,000 = .8. Another household might increase its spending by $1,900
if its income rose by $2,000; the MPC of this second household would be .95. Since
CONSUMPTION ∂ 667