PART TWO MACROECONOMICS

Outlays and Components of Demand

In the previous sections, we started with GNP and asked how much of the value of goods and services produced actually gets into the hands of households.In this section we present a different perspective on GNP by asking who buys the output, rather than who receives the income.More technically, we look at the demand for output and speak of the components of the aggregate demand for goods and services.

Total demand for domestic output is made up of four components:（1） consumption spending by households; （2）investment spending by businesses or households; （3）government（federal, state, and local）purchases of goods and services; and（4）foreign demand.We shall now look more closely at each of these components.

Consumption

Table 2-1 presents a breakdown of the demand for goods and services in 1982 by components of demand.The table shows that the chief component of demand is consumption spending by the personal sector.This includes anything from food to golf lessons, but involves also, as we shall see in discussing investment, consumer spending on durable goods such as automobiles—spending which might be regarded as investment rather than consumption.

Government

Next in importance we have government purchases of goods and services. Here we have such items as national defense expenditures, road paving by state and local governments, and salaries of government employees.

We draw attention to the use of certain words in connection with government spending.We refer to government spending on goods and services as purchases of goods and services, and we speak of transfers plus purchases as government expenditure. The federal government budget, of the order of$650 billion, refers to federal government expenditure.Less than half that sum is for federal government purchases of goods and services.

Investment

Gross private domestic investment requires some definitions.First, throughout this book, investment means additions to the physical stock of capital.As we use the term, investment does not include buying a bond or purchasing stock in General Motors.Practically, investment includes housing construction, building of machinery, business construction, and additions to a firm's inventories of goods.

The classification of spending as consumption or investment remains to a significant extent a matter of convention.From the economic point of view, there is little difference between a household building up an inventory of peanut butter and a grocery store doing the same.Nevertheless, in the national income accounts, the individual's purchase is treated as a personal consumption expenditure, whereas the store's purchase is treated as investment in the form of inventory investment.Although these borderline cases clearly exist, we can apply a simple rule of thumb :that investment is associated with the business sector's adding to the physical stock of capital, including inventories.

Similar issues arise in the treatment of household sector expenditures.For instance, how should we treat purchases of automobiles by households? Since automobiles usually last for several years, it would seem sensible to classify household purchases of automobiles as investments.We would then treat the use of automobiles as providing consumption services.（We could think of imputing a rental income to owner-occupied automobiles. ）However, the convention is to treat all household expenditures as consumption spending. This is not quite so bad as it might seem, since the accounts do separate households'purchases of durable goods like cars and refrigerators from their other purchases.When consumer spending decisions are studied in detail, expenditures on consumer durables are usually treated separately.

In passing, we note that in Table 2-1, investment is defined as“gross”and“domestic.”It is gross in the sense that depreciation is not deducted.Net investment is gross investment minus depreciation.Thus NNP is equal to net investment plus the other categories of spending in Table 2-1.

The term domestic means that this is investment spending by domestic residents but is not necessarily spending on goods produced within this country.It may well be an expenditure that falls on foreign goods.Similarly, consumption and government spending may also be partly for imported goods. On the other hand, some of domestic output is sold to foreigners.

Net Exports

The item“Net exports”appears in Table 2-1 to show the effects of domestic spending on foreign goods and foreign spending on domestic goods on the aggregate demand for domestic output.The total demand for the goods we produce includes exports, the demand from foreigners for our goods. It excludes imports, the part of our domestic spending that is not for our own goods.Accordingly, the difference between exports and imports, called net exports, is a component of the total demand for our goods.

The point can be illustrated with an example.Assume that instead of having spent $1,992 billion, the personal sector had spent $20 billion more. What would GNP have been? If we assume that government and investment spending had been the same as in Table 2-1, we might be tempted to say that GNP would have been $20 billion higher.That is correct if all the additional spending had fallen on our goods.The other extreme, however, is the case where all the additional spending falls on imports.In that event, consumption would be up $20 billion and net exports would be down $20 billion, with no net effect on GNP.

Rudiger Dornbusch and Stanley Fischer, Macroeconomics 3rd ed.© 1984, pp.4345.Reprinted by permission of McGraw-Hill Book Company, New York.

KeyTerms and Concepts

aggregate demand refers to total demand in four aspects:（1）the demand of households for consumption goods and services, or consumption; （2）the demand of businesses for capital goods, or investment; （3）the demand of governments for goods and services, government expenditure; and（4）the net foreign demand for goods and services（exports minus imports）.

GNP gross national product.

transfers or transfer payments.Expenditures for which no goods and services are exchanged, including welfare payments, social security benefits, and unemployment compensation.

physical stock of capital refers to durable or long-lasting inputs, such as machinery, tools, and buildings.

NNP net national product.Gross national product（GNP）minus the depreciation of the existing capital stock over the course of the period.