Spending models predict changes in consumer behavior in an economy. Aggregate spending measures an economy’s output, while the income approach measures employee wages, corporate profits, rents, and interest. The aggregate demand-aggregate supply model uses aggregate spending components and specific measures to produce two curves representing supply and demand. The model can be used for both Keynesian and monetarist economics.
Spend models are an attempt to use a mathematical equation to map and predict changes in general consumer behavior in an economy. Models are used in macroeconomics, which measures activity in an entire economy, rather than microeconomics, which looks at a specific market, such as in one type of product or service. Despite the name, spending models can be used to examine output in an economy; this is simply because the value of the goods produced and sold is inherently equal to the value of the total expenditure.
The most basic of the various spending models is aggregate spending, which is a way of measuring an economy’s output, better known as gross domestic product. This model states that GDP consists of the totals of consumer spending, business investment spending, government spending, and net exports. In this context, net exports are the total value of goods exported by a country, minus the total value of goods imported.
Aggregate spending is used in contrast to the income approach, which states that GDP is the total of employee wages, corporate profits, rents, and interest. The rationale is that all the money people and businesses spend on goods produced in a country ends up as some form of income. There is an argument that this model is less accurate, as it does not include depreciation or indirect activity taxes such as sales taxes. This means that a GDP figure produced by an income model will usually be lower than one produced by aggregate spending.
The data produced by aggregate spending forms the basis of some more advanced spending models. One is the aggregate demand-aggregate supply model. This uses aggregate spending components, along with more specific measures such as overall price levels, to produce two curves on a graph, representing the overall levels of supply and demand in an economy.
Someone using the aggregate demand-aggregate supply model would shift one of the curves in response to a specific change in the economy, such as an overall increase in taxes or an overall decrease in exports. The model theory is that the movement of a curve changes the point of intersection between the two curves; this in turn shows the effect the change would have on both output and price levels. This makes the model particularly popular with a wide range of economists, as it can be used for both Keynesian economics, which emphasizes government activity through spending and taxation, and monetarist economics, which emphasizes the control the money supply through measures such as printing more cash or changing exchange rates.
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