ECO102H1 Study Guide - National Income And Product Accounts, Personal Consumption Expenditures Price Index, Consumption Function
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ECO102H1 Full Course Notes
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Assumptions: price level is fixed and there are only changes in real gdp. There is no depreciation and no indirect taxes. Aggregate expenditure: the sum of desired or planned spending on domestic output by households, firms, governments, and foreigners. Ae = c + i + g + (x - im) National income accounts measure actual expenditures in each of the four expenditure categories while national income theory deals with desired expenditures. The ae function relates the level of desired ae to the level of real income. There is a level of income (y*) at which ae is equal to the actual level of output (y) y = ae. Actual expenditure (gdp) is equal to desired expenditure at y*. Y* is the equilibrium level of income or output for the economy. If ae > y, there is excess desired spending in the economy (excess demand) and the level of output will tend to rise.
