G in Aggregate Demand (1 Viewer)

[snowbunny]

Could someone please clarify if G in aggregate demand is

net gov't expenditure (tax minus expenditure) <-- is that the right way around?

OR

just gov't expenditure alone



in one text book it says specifically net but in other it doesnt say..so just making sure..

thanks!

 

[finishline]

hi, srry i dont no the answer to ur question, but could u please tell me how to make a post? any help would b appreciated thx

 

[latvia]

hi, srry i dont no the answer to ur question, but could u please tell me how to make a post? any help would b appreciated thx

When you go to the forum where you want to post in
on the left hand side (close to top of the page...)
for example in this particular section,
there is a "New Thread" button on top of:
Threads in Forum : Economics

just click it and follow the prompts

 

[mitsui]

Could someone please clarify if G in aggregate demand is

net gov't expenditure (tax minus expenditure) <-- is that the right way around?

OR

just gov't expenditure alone



in one text book it says specifically net but in other it doesnt say..so just making sure..

thanks!

G is the net expenditure

ie. expenditure minus taxation

 

[gnrlies]

G is the net expenditure

ie. expenditure minus taxation

No its not net expenditure

Its simply government expenditure.

The C+I+G+X-M model that you all know about is a simplified version.

The real version is:

a + b(1-t)Y + d + er + G + X - M

where:

C = a + b(1-t)Y
a = autonomous consumption
b = average propensity to consume
(1-t)Y = disposable income (t is the tax rate, and Y is income)

I = d + er

d = autonomous investment
e = interest sensitivity of investment (is negative)
r = interest rate

You dont need to know about this, but I think it helps to demonstrate why G is not net government spending but rather total government spending - because taxation impacts on consumption and is reflected in consumption.

 

[snowbunny]

because taxation impacts on consumption and is reflected in consumption.

that makes sense! thanks!

 

[mitsui]

i am still a bit confused

isnt taxation taking away from AD? so shouldnt we have a net exp like (X-M)??
=@
thanks

 

[babiisapphire]

i am still a bit confused

isnt taxation taking away from AD? so shouldnt we have a net exp like (X-M)??
=@
thanks

G is just the government expenditure component.. the taxation is not taken into consideration when calculating aggregate demand.. the only net thing is for the overseas sector so yeh.. x-m as you said.. cuz maybe the our demand for imports sorta cancel out some of the demand for exports? haha.. idk but just that its the way it goes..

AD = C + I + G + (X - M)

 

[mitsui]

ok cool. thanks =D

 

[gnrlies]

i am still a bit confused

isnt taxation taking away from AD? so shouldnt we have a net exp like (X-M)??
=@
thanks

Taxation does take away from aggregate demand, but it reduces the consumption component (and investment as well if you were the make the model i provided more detailed).

It isn't a net relationship because there are multiplier effects that need to be considered, as well as the fact that you are double counting the taxation as it is reflected in consumption.