macro5-1 - value of goods and services bought from...

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The components of aggregate expenditure are: consumption, planned investment, government purchases, and net exports. Aggregate expenditure can be expressed by an equation that involves these four components as: C (consumption) + I (investment) + G (government) + (X-M) (Net exports). Consumption: Consumption refers to household spending on consumer durable and non- durable goods and service such as necessities like health care, food etc. Consumption depends on level of disposable income and Marginal Propensity to Consume (MPC). If MPC is high, consumers tend to spend most of the disposable income on consumption and save less, which increases Aggregate Expenditure and GDP. Net Export is the value of goods and services sold to overseas companies, minus the
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Unformatted text preview: value of goods and services bought from overseas. Net export is defined as: Net Exports = Exports Imports When income rises, consumers spend more and some of the spending goes to imported goods. Hence, increase in income tends to reduce net export. Net export will increase if export increases and/or import decreases. The net export also depends on income level in foreign countries. If income level in foreign countries increases, they will import more and so export of the country will increase. Other factors affecting net export are exchange rate, price level in own country as well as in foreign countries, interest rate in own country and foreign countries etc. Macro 2 ECON, Student edition pages 131-137 and 142, by William A. McEachern...
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