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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, used to determine equilibrium GDP.
  • Private Open Economy
    Economic system with households and firms, no government, and international trade present.
  • Consumption Function
    Mathematical relationship showing how spending by households changes with income, often with a fixed intercept and a marginal propensity.
  • Investment
    Spending by firms on capital goods, added to consumption to calculate total expenditures in the model.
  • Net Exports
    Difference between a country's exports and imports, included in total spending for open economies.
  • Macroeconomic Equilibrium
    Point where total spending equals total production, typically found where two lines intersect on a graph.
  • 45-Degree Line
    Graphical tool representing all points where spending equals output, used to find equilibrium.
  • Multiplier Effect
    Process where a change in spending leads to a larger change in GDP due to repeated rounds of income and spending.
  • GDP
    Total value of all goods and services produced within a country, used as a measure of output.
  • Marginal Propensity to Consume
    Fraction of additional income that households spend on consumption, determining the slope of the consumption function.
  • Intercept
    Constant term in a linear function, representing spending when income is zero.
  • Slope
    Rate at which spending increases as income rises, often determined by the marginal propensity to consume.
  • Trade
    Exchange of goods and services with other countries, distinguishing open from closed economies.
  • Government Purchases
    Spending by the public sector, excluded from the private open economy model.