Desired aggregate spending, Macroeconomics

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Desired Aggregate Spending

Desired aggregate spending refers to the volume of purchases of the currently produced 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 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 production by the productive sectors of the economy.

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

Private Consumption Spending

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

Consumption is a function of disposable money income. Consumption is directly related to income. As disposable income rises, consumption expenditure also increase, but in a lesser proportion. It is known as the psychological law 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 and of structures like factory building, dams, roads, bridges, shopping complexes, etc.

(c) Inventory building, i.e., stock of raw materials, semi-finished goods and unsold finished goods.

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

 

 


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