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Macro Lecture 6

This lecture discusses the components of aggregate expenditure, focusing on planned investment, government expenditure, and net foreign expenditure. It explains how planned investment is fixed and influenced by interest rates and technology, while government expenditure affects the economy through taxation and spending policies. Additionally, it covers the concepts of net exports, trade balance, and the factors influencing exports and imports.

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Macro Lecture 6

This lecture discusses the components of aggregate expenditure, focusing on planned investment, government expenditure, and net foreign expenditure. It explains how planned investment is fixed and influenced by interest rates and technology, while government expenditure affects the economy through taxation and spending policies. Additionally, it covers the concepts of net exports, trade balance, and the factors influencing exports and imports.

Uploaded by

homyyza
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Macroeconomics Dr/ Zeyad Albukhaiti

Lecture 6

The Components of Aggregate Expenditure Elements


2) The Investment (I)
 Planned investment
"Those additions to capital stock and inventory that are planned by firms".
 The planned investment function
We will assume that planned investment is fixed. It does not change when income
change, so its graph is a horizontal line.

planned investment Function

Investment function I = I0
Where,
I : total investment
I0 : autonomous investment
 investment ( I ) is assumed to be fixed (autonomous) not affected by change in
income changes, so when income change, so(I) is represented by a horizontal line.
 Factors Affecting Investment Expenditure:
1. Interest rate: (negative relationship)
 The decrease in interest rate reduces the cost of borrowing which
encourages firms to take more loans & this will increase investment (investment
curve shifts upward) & vice versa.
Macroeconomics Dr/ Zeyad Albukhaiti
Lecture 6
2. Technology & expected profitability of investment: (positive relationship)
 The increase in level of technology increase the expected profitability of
investment (investment curve shifts upward) & vice versa.

 Planned investment & Actual investment


 Actual investment = Planned investment + unplanned change in inventories.
So
 If unplanned change in inventories in +ev Actual investment > Planned investment.

 If unplanned change in inventories in zero Actual investment = Planned investment.

 If unplanned change in inventories in - ev Actual investment < Planned investment.

3) Government Expenditure (G)


Government expenditure refers to the purchase of goods and services, which include
public consumption and public investment, and transfer payments consisting of income
transfers (pensions, social benefits) and capital transfer.

 The government functions in economic activity


Governments influence the economy by changing the level and types of taxes, the
extent and composition of spending, and the degree and form of borrowing.
Governments directly and indirectly influence the way resources are used in the
economy.

When the government decreases taxes, disposable income increases. That translates
to higher demand (spending) and increased production (GDP). So, the fiscal policy
prescription for a sluggish economy and high unemployment is lower taxes. Spending
policy is the mirror image of tax policy.
Macroeconomics Dr/ Zeyad Albukhaiti
Lecture 6

 The government function


G = G0

G = G0

4) Net foreign Expenditure (NX)


The United States imports and exports goods and services. The difference
between the value of its exports and the value of its imports is called net exports. Net
exports are sometimes referred to as the trade balance (or balance of trade). If the
value of exports is greater than the value of imports, a country is said to be running a
trade surplus; if the value of imports is greater than the value of exports, the country is
running a trade deficit.

 The Exports & Imports Function


 Exports Function
Exports of a certain country depends on external factors as follow:
1- The prices level in other countries.
2- The incomes level in other countries.
3- Tariffs.
4- The trade policies with the rest world.
5- Exchange rates.
So, the exports function will be X=X0
Macroeconomics Dr/ Zeyad Albukhaiti
Lecture 6

X=X0
X

X= X0

 Imports Function
Imports as opposed to exports depends on internal factors, So, the exports
function will be as follow:
M= m0 + m1Y
Where:

 M : is the total imports.


 m0 : autonomous imports.
 m1 : the marginal slope of imports function.
 Y : income.
 m1Y : Induced imports.

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