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AE Model: Private Open Economy definitions

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  • Aggregate Expenditures
    Total spending in an economy, including consumption, investment, and net exports, but excluding government purchases.
  • Private Open Economy
    An economic system with no government involvement, but includes trade, investment, and consumption.
  • Consumption Function
    A mathematical relationship showing how spending by households changes with GDP, often with a fixed intercept and a slope.
  • Investment
    Expenditures on capital goods that add to productive capacity, included in total spending calculations.
  • Net Exports
    The value of a country's exports minus its imports, representing trade's impact on total spending.
  • Macroeconomic Equilibrium
    A point where total spending equals total production, typically found where two lines intersect on a graph.
  • GDP
    The total value of goods and services produced within a country, used as a measure of economic output.
  • 45-Degree Line
    A graphical tool representing points where spending equals production, used to identify equilibrium.
  • Multiplier
    A concept describing how changes in spending lead to larger changes in GDP, affecting investment and net exports.
  • Intercept
    The starting value of a function on a graph, showing spending when GDP is zero.
  • Slope
    The rate at which spending increases as GDP rises, often determined by the marginal propensity to consume.
  • Marginal Propensity to Consume
    The fraction of additional income that households spend, influencing the slope of the consumption function.
  • Trade
    The exchange of goods and services with other countries, affecting net exports in the spending equation.
  • Market Supply
    The total amount of goods and services available for sale in an economy, influencing equilibrium price.