The expenditures approach says GDP = consumption + investment + government expenditure + exports – imports. The income approach sums the factor incomes to the factors of production. The output approach is also called the “net product” or “value added” approach.

What happens when output is greater than aggregate?

If aggregate expenditure exceeds the potential output of the economy, then firms must pay higher prices for its factors of production, including overtime to its workers, and pay higher variable costs when using existing facilities for longer time periods to increase production.

Why is income curve 45 degrees?

The reason why these diagrams have this 45-degree line is that for every point on the line, the value of whatever is being measured on the x-axis is equal to the value of whatever is being measured on the y-axis. Equilibrium national income occurs where Y = E, and this would be every point on the 45 degree line.

Why is aggregate supply 45 degrees?

The Aggregate Supply curve is represented by the 45° line. Throughout this line the planned expenditure is equal to the planned output. That is AS = Y = Expenditure. The implication of 45° line is that in case of any disequilibrium, AS will be adjusted in a way to equate AD in order to restore equilibrium back.

What are the components of expenditure?

There are four types of expenditures: consumption, investment, government purchases and net exports. Each of these expenditure types represent the market value of goods and services.

How does the expenditure-output model work in economics?

Figure D1 The Expenditure-Output Diagram The aggregate expenditure-output model shows aggregate expenditures on the vertical axis and real GDP on the horizontal axis. A vertical line shows potential GDP where full employment occurs. The 45-degree line shows all points where aggregate expenditures and output are equal.

What does the aggregate expenditure output model show?

The Expenditure-Output Diagram The aggregate expenditure-output model shows aggregate expenditures on the vertical axis and real GDP on the horizontal axis. A vertical line shows potential GDP where full employment occurs.

How is the expenditure-output model used in Keynesian economics?

The axes of the Keynesian cross diagram presented in (Figure) show real GDP on the horizontal axis as a measure of output and aggregate expenditures on the vertical axis as a measure of spending. The aggregate expenditure-output model shows aggregate expenditures on the vertical axis and real GDP on the horizontal axis.

When does equilibrium occur in the expenditure-output model?

Equilibrium occurs at E0, where aggregate expenditure AE0 is equal to the output level Y0. Remember that GDP can be thought of in several equivalent ways: it measures both the value of spending on final goods and also the value of the production of final goods.