2.1 - Relevant Syllabus.
- The components of aggregate expenditure (AE).
- Consumption.
- Investment.
- Government spending.
- Net exports.
2.2 - Summary.
2.3 - Content.
2.3.1 - The concept of aggregate expenditure.
Aggregate expenditure (AE) is the sum of all expenditure on final goods and services undertaken in the economy during a specific time period.
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AE = C + I + G + (X - M)
- Consumption (C).
- Investment (I).
- Government spending (G).
- Net exports (X - M).
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In 2021 - 2022, Australia’s GDP was approx. $2,091 billion.
- GDP = output = AE = income.
- Consumption = 53% (2021 - 2022).
- Investment = 18% (2021 - 2022).
- Government expenditure = 27% (2021 - 2022).
- Net exports = 2% (2021 - 2022).
2.3.1.1 - Consumption (C) as a component of AE.
Consumption is household expenditure on final goods (non-durables and durables) and services.
Generally, consumption accounts for 49% - 60% of AE, and averaged ~56% of AE between 1980 - 2022.
In 2021 - 2022, consumption expenditure (C) accounted for 53% of GDP ($1,103 billion).
Consumption expenditure (C) consists of:
- Expenditure on non-durable goods.
- Expenditure on durable goods.
- Expenditure on services.
Goods are tangible products whereas services are intangible actions with both providing value to consumers, firms, and the government. Goods e.g., a car. Services e.g., education.
Non-durable goods are consumed shortly after purchase (up to 3 years) and are usually essential which make non-durable consumption spending stable over time accounting for ~ 35% of C in AE. - Non-durable goods e.g., food. - Essential is when the good satisfies regular needs of households.
Durable goods lasts for more than three years and is often discretionary, accounting for ~15% of C in AE. - Durable goods include: - White goods (large items e.g., washing machine). - Brown goods (light household items e.g., TV) - Furniture, sporting equipment, motor vehicles, etc. - Discretionary spending can be postponed and is not essential.
Services can be essential (e.g., health) or discretionary (e.g., cinema) and accounts for ~50% of C in AE.
2.3.1.2 - Investment (I) as a component of AE.
I in AE refers to private sector investment (I) which is the spending on new capital goods and additions to investories (stock).
Generally, private investment (I) accounts for 16% - 23% of AE (1980 -2022) and averaged 20%.
In 2021 - 2022, I accounts for 18% of AE.
Investment spending (I) includes:
- Business investment - privately funded business spending on capital goods used in production (e.g., equipment, machinery, and buildings).
- Housing investment - Private expenditure on new housing.
- Inventories - Unsold goods or stock.
Investment spending is volatile with its fluctuations being the key factor in changes of the business cycle.
2.3.1.3 - Government expenditure (G) as a component of AE.
Government spending (G) includes current spending (G1) and capital spending (G2). - Current spending finances day-to-day business of the government e.g., wages and purchase of G&S. - Capital spending is spending on public infrastructure e.g., power and water supply and schools.
Generally, government spending (G) accounts for 24% of AE (1980 - 2022).
In 2021 - 2022, government spending (G) accounted for 27% of AE ($580 billion).
2.3.1.4 - Net exports (X - M) as a component of AE.
Net exports refers to the difference between exports and imports. - Exports occur when overseas residents purchase Australian G&S, and is an injection in the circular flow of income. - Imports occur when Australian residents purchase overseas G&S, and is a withdrawal from the circular flow of income. - Residents include households, firms, and government.
Generally, net exports account for -1% of AE (1980 - 2022).
In 2021 - 2022, net exports experienced a surplus and accounted for 2% of AE.
2.3.1.3 - Trend of the components of AE (1980 - 2022).
Consumption in AE has been falling since 2016 which was exaberated by COVID-19:
- Increase household savings.
Net exports, normally a negative in Australia, has been positive the last few years up to 6% of GDP:
- Outbound tourism (normally Australia’s largest import) was affected by COVID-19.
- Decrease in consumption and investment spending decreased demand for imports.
Private investment has been falling since 2016 and was exaberated by COVID-19.
Government spending rose since 2016 (peaks in 2020) reflecting increased need for welfare payments.