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Aggregate Demand and Aggregate Supply (MACROECONOMICS)

Aggregate Demand is the sum of the demand for all final goods and services in the economy.

Republic of the Philippines University of Rizal System Binangonan, Rizal KST Private Elementary Academy Payroll Manual Project in Cost Accounting Submitted By: Jaynie Phearl Francisco Gil Jericho Ojeda Richmond Mico Rigor Mary Joy Vale Maria Alicia Villamor BSA III – 1 Submitted To: Ms. Susan Liwanag Diaz – Cadiente, CPA Instructor AGGREGATE EXPENDITURE AND ITS COMPONENTS Aggregate Expenditure Aggregate Demand is the sum of the demand for all final goods and services in the economy. Aggregate Expenditure can also be seen as the quantity of real gross domestic product demanded at different price levels. Aggregate Expenditure = GDP GDP = C + I + G + (X - M) Consumption (C) spending or purchases by households on final goods and services. Planned Investment (I) planned spending by firms on capital goods and by households on their needs. (eg. house, cars, etc.) Government Purchases (G) spending by local, state, and national government on goods and services and infrastructures. Net Exports (X-M) spending by firms and households on goods and services produced in a country minus spending on goods and services produced in other countries. CONSUMPTION AND SAVINGS DECISION Consumption function: The relationship between consumption spending and disposable income. Marginal propensity to consume (MPC): The slope of the consumption function. MPC represents the amount by which consumption spending changes when disposable income changes. We can also use the MPC to determine how much consumption will change as income changes: Disposable income = National income + (Government transfer payments -Taxes) Formula Derivation: Net taxes = Taxes - Government transfer payments Disposable income = National income - Net taxes National income = Disposable income + Net taxes If we calculate the slope of the line between points A and B, we get a result that will not change whether we use the values for national income or the values for disposable income. Using the values for national income: Using the corresponding values for disposable income from the table: National income and disposable income differ by a constant amount, so changes in the two numbers always give us the same value. For the economy as a whole, we can write the following: National income = Consumption + Saving + Taxes Y = C + S + T Change in national income = Change in consumption + Change in saving + Change in taxes ∆Y =∆ C +∆ S + ∆T Marginal propensity to save (MPS): The amount by which saving changes when disposable income changes. We can measure the MPS as the change in saving divided by the change in disposable income (again ignoring the difference between national income and disposable income). OR When taxes are constant, MPC plus MPS must always equal 1 because additional income not consumed must instead be saved. THE ROLE OF INVESTMENTS IN THE NATIONAL ECONOMY INVESTMENTS Investments - an increase in capital spending. e.g. buying new machines, building bigger factories etc. Investment is a component of Aggregate Demand (AD). Therefore, if there is an increase in investment it will help to boost AD and therefore economic growth. Investment is the value of machinery, plants and buildings that are brought by firms for production purposes. Investments on bonds and stocks can also affect the national economy. The roles of investments are: 1. It contributes to current demand of capital goods, thus it increases domestic expenditures. 2. It enlarges the production base (installed capital) increasing production capacity. 3. It modernizes production processes, improving cost effectiveness. 4. It reduces the labor needs per unit of output, thus potentially producing higher productivity and lower employment. 5. It allows the production of new and improved products, increasing value added production. 6. It incorporates international world-class innovations and quality standards, bridging the gap with more advanced countries and helping exports and an active participation to international trade. NET EXPORTS Net Exports -refer to the value of a country's total exports minus the value of its total imports. it is used to calculate a country's aggregate expenditures, or GDP in an open economy. -equals the amount by which foreign spending on a home country's goods/services exceeds the home country's spending on foreign goods and services. Differences Between Exports and Imports Trade Surplus X>M Trade Deficit X<M Why do countries trade? Idea of Mercantilism Specialization- Better quality and Production Efficiency Costs Saving and Economies of Scale Maximization of resource Abundance AGGREGATE PLANNED EXPENDITURE & REAL GNP For the economy as a whole, macroeconomic equilibrium occurs where total spending, or aggregate expenditure, equals total production, or GDP: The Relationship between Aggregate Expenditure and GDP At points above (below) the line, planned aggregate expenditure is greater (less) than GDP. All points of macroeconomic equilibrium must lie along the 45 degree line. However, only one of these points will represent the actual level of equilibrium real GDP during any particular year. The aggregate expenditure function: the amount of planned aggregate expenditure that will occur at every level of national income, or GDP. Real GNP -is a gross national product that has been adjusted to account for inflation which is the fluctuation of cost and prices over time. GNP=GDP + Net Factor Income from Abroad