Components Of Desired Aggregate Spending

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Components of Desired Aggregate Spending

Desired aggregate spending refers to the volume of purchases of the currently produce goods and services that all spending units in the economy wish to make. It is also known as ‘planned spending’ or ‘intended spending’. Desired spending is not an imaginary concept, it refers to what people want to want to spend out of their available resources. It is, however, different from ‘actual spending’. Desired spending refers to the expenditure that the spending units wish to make, whereas, actual spending is the actual expenditure on the goods and services produced by the productive sectors of the economy.

In the two-sector model, desired aggregate spending or aggregate expenditure comprises: (1) Private consumption spending, and (2) Investment spending.

Private Consumption Spending

Personal disposable income (i.e., personal income minus personal tax) can either be  spent on consumption expenditure or could be saved. The act of consumption saving are interrelated. That part of disposable income an individual decides not to spend on consumption is automatically saved.

In the earlier chapter we have explained that consumption is a function of disposable money income. Consumption is directly related to income. As disposable income rises, consumption expenditure also increases, but in a lesser proportion. It is known as the psychological low of consumption.

Investment Spending

Investment refers to spending on the real assets. Investment expenditure can be made on the following:
(a)    Purchase and acquisition of equipment, plant, machinery, tools, etc.
(b)    Construction of structures like factory building, dams, roads, bridges, shopping complexes, etc.

Investment expenditure is influenced by the real rate of interest and marginal efficiency of capital.

The aggregate Spending Function

The aggregate spending function is obtained as a sum of private consumption spending and investment spending. It is also referred to as aggregate expenditure (AE)

                     AE = C + I
Where         AE = Aggregate expenditure,
                     C = Consumption expenditure, and
                      I = Investment expenditure.

In the earlier chapter we have already discussed as to how the aggregate spending function is obtained. The slope of the aggregate expenditure curve (AE) depends on the marginal propensity to spend (Z)

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