Output with aggregate expenditure

We can use the total expenditures of an economy to calculate its output (a.k.a. GDP)!

And remember...

Aggregate Expenditure is the total spending on goods and services in an economy.

We are able to calculate GDP (a.k.a. output) of an economy by calculating the total spending with the Expenditure Approach.

GDP = Consumption + Gross Investment + Government Purchases + Net Exports

An economy is equilibrium when its total output (Real GDP [Y]) equals its total spending (Aggregate Expenditures).

In other words, when the members of an economy are spending their money on the goods and services that are outputted by the economy!

Solving for output

Scenario: Given that the consumption schedule of Country ABC is C = 50 + 0.6(Y - 10), gross investment is $100, government purchases are $75, and net exports are $25, determine the equilibrium level of output with the aggregate expenditures model.

Y = Consumption + Gross Investment + Government Purchases + Net Exports

Remember, we're solving for equilibrium output (Y)... and output is GDP! That's why we're able to use the Expenditure Approach formula here to solve for Y.

Consumption = 50 + 0.6(Y - 2)
Gross Investment = $100
Government Purchases = $75
Net Exports = $25

Y = 50 + 0.6(Y - 10) + $100 + $75 + $25
Y = 50 + 0.6Y - 6 + 100 + 75 + 25
Y = 50 + 0.6Y - 6 + 100 + 75 + 25
Y = 0.6Y + 244
0.4Y = 244
Y = 610

Answer: The equilibrium level of output (a.k.a. Real GDP) in this economy is $610.

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