So by the expenditure model our National Income is equal to our collective spending (Aggregate Demand).

Let’s see what influences each element of this important equation.

Consumption – Spending by Households

Income, credit availability, interest rates and our MPC affect our consumption. I would add expectations/fear to that list.

Watch this short film.

Investment – Spending on Capital Goods by Investors

Expectations, interest rates are the key drivers here. Not according to Homer though…

 

Government – Spending By Government

Nothing other than the election cycle Government spending tends to be quite loose. Borrowing rates may discourage deficit spending.

These examples of random spending from the USA shows some of the more fun things the State spends money on.

REMEMBER THOUGH

Government spending is income for citizens so even the bizarre spending examples above are injections of funds into the economy.

US National Debt isn’t actually spiralling out of control either, as Krugman reports.

Net Exports – (Exports – Imports)

What we import is what we can afford so income determines the size of imports. There’s an MPM to imports too. Our exchange rate has a role to play in determining the price of imports. Learn more about exchange rates below.

Exports rely on how attractive our goods/services are abroad. A cheap currency means cheap exports and a tourism boost.

We spend a lot of time worrying about foreign markets. The Competitiveness Council tries to keep Ireland reaching for more export opportunities.

 

Finally add all the above elements to calculate the size of our economy in a given time period (AD = C + I + G + (X – M)).