The consumption function. §

Aggregate expenditure = C + I + G + (X-M)

Consumption expenditure is the most important component of aggregate expenditure according to Keynes.

Consumption expenditure accounts for around 55% of Australia’s aggregate spending.

Factors affecting consumption expenditure (SPICE):

• Stock of wealth.
• Policies of government.
• Income.
• Cost of credit.
• Expectations.

Yd = Disposable income.

C = Consumption expenditure.

S = Savings.

As income is 0, an economy will have to borrow money from another economy, making S the same amount as C, but negative reflecting debt.

Consumption function (Cf) = Autonomous spending (a) + Marginal propensity to consume (b) x Disposable income (Yd)

Autonomous spending occurs no matter the amount of income as they are essential to survival (in the table above, its 60).

Marignal propensity to consume is the proportion of disposable income consumers are likely to spend.

Disposable income is income after tax.

Changing labels:

• Instead of consumer spending and saving, use aggregate expenditure.
• Instead of disposable income, use real GDP or real GNI (Gross national income).

The gap between the x-axis and a and -a should be the same, reflecting the mirror of spending and savings when disposable income (real GDP / real GNI) is 0.