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Unformatted text preview: planned investment
The ﬁrm will project their sales and year end inventories.
At the end of the period the ﬁrm will realize their actual investment
which is based on their actual (not predict) inventories. Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 9 / 43 PAE Investment Investment Example At the begin of the period a ﬁrm plans on selling $1,000,000 in
goods, having $100,000 in inventories, and making capital
investments totaling $500,000. This ﬁrm has planned investment of
At the end of the period the ﬁrm has sales totalling $900,000. Which
is $100,000 less than their expectations. Instead of having $100,000
in inventories the ﬁrm will ﬁnd $200,000. Actual investment is
calculated by added together capital investments and actual
inventories. In this case actual investment, I , equals $700,000.
if I > Ip , GDP will increase, but next period ﬁrms will produce less. Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 10 / 43 PAE Investment GDP and PAE GDP includes realized investment: Y = C + I + G + NX .
Planned aggregate expenditures includes planned investment:
PAE = C + I p + G + NX (1) If Y > PAE than ﬁrms have overproduced and will reduce future
If Y < PAE than ﬁrms have underproduced and will increase future
The economy will be in equilibrium when PAE = Y . Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 11 / 43 PAE Consumption Consumption
Consumer spending is the largest part of GDP and aggregate
Consumption accounts for nearly 70% of GDP.
In our model we are going to look at consumption as a function of:
After-tax income: Consumption is positively related to after-tax
Wealth (changes in asset prices): A higher level of wealth will
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- Spring '09