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Changes in Components of Aggregate Demand II (Net Exports (If the national…
Changes in Components of Aggregate Demand II
Net Exports
Exports are domestic goods that are bought by foreigners.
Imports are the goods and services that are bought from foreign producers
Exports result in an inflow of export revenues to the country
Imports result in an outflow of import expenditure.
If the national income of a country rises, the people from the country will be more willing and able to buy imported goods and services from another country. Thus, the second country's AD will also rise
Trade policies can affect the value of a country's exports: more tariffs = less importa
Increase in exchange rate would make imported goods less expensive and could reduce import expenditure
Investment
Definition
The addition of capital stock to the economy.
capital stock includes all goods that are made by people
Carried out by firms to produce goods and services e.g. factories, machinery, offices or computer
A type of expenditure (leakage)
Types
Replacement Investment
Firms spend on capital in order to maintain the productivity of their existing capital
Induced Investment
Firms spend on capital to increase their output to respond to higher demand in their economy
Changes
Based on expectations of future demand and supply of a firm, a firm will choose to invest or not, e.g if demand is forecast to increase, then the firm will invest
If overall state of technology improves, firms are more likely to invest to change features of products. If firms do not invest, they will be at a competitive disadvantage to them in comparison to other firms
If national income increases, consumption increases, so there is more pressure for firms to invest
Borrowing
Increase in interest rate of borrowing = decrease in investment
Government Spending
The amount of government spending depends on its policies and objectives.
Government can spend money on things such as: Education, health, defence, transport, housing, law and order.
Two types of policies
Fiscal: involving tax and government spendings
Monetary: interest rates
Government objectives include: low unemployment, steady and sustained economic growth, stable prices (low inflation)
The government will do what the voters want to get revoted. If voters demanding more of them then they will increase spending.
Consumption
Definition
Consumption refers to the total spending by consumers on domestic goods and services
Changes in Disposable Income
If disposable income increases, consumption will also increase. If it decreases, consumption will likewise decrease.
Disposable income is the income remaining to a consumer after deduction of taxes.
Changes in interest rates
An increase in interest rates, will reduce the availability of financing, and thus, will decrease spending and therefore consumption in a economy.
A decreased interest rate will increase the amount of consumption, as more financing is available.
Taxes
Increase in taxes faced by a consumer would result in decreased consumption. A decrease in taxes results in increased consumption.
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