Alright. So let's try this numerical example of our aggregate expenditures model. So what we're going to notice here is that we've got our real GDP and we're solving for our aggregate expenditures, notice it gives us consumption investment, government purchases and net exports at different levels of GDP. So why is there going to be different levels of consumption um at these different levels of GDP, notice that the other three are staying constant, right? Investment. Just like I said, we're going to keep these constant investment, government purchase and net exports are staying constant at different levels of GDP. But what about consumption? Remember as there's more production being being produced is that there's more goods being produced in the economy. What we need to hire more people, there's gonna be more people making money, right? So what we're seeing is that wages are, there's more income being made as GDP goes up because we're producing more stuff. So people have to be earning that money. And what did we learn about consumption as we learn more as we earn more money, we spend more money, right? That's the consumption idea that we learned with the consumption function and that has to do with that marginal propensity to consume. So notice here, when we went up from 16,000 to 18,000 in G. D. P. There was this $2000 increase in GDP. Well it didn't totally go up by 2000, it didn't go from 12 400 to 14. 400. No because we earned more money, but we didn't spend it all, We saved some as well and we spent some. So that's the idea is this consumption is going to be going up, but not as fast as the GDP, because there's gonna be some of it being saved as well. So let's go ahead and use our consumption investment, government purchases and net exports to calculate our aggregate expenditures. Remember, we're defining aggregate expenditures as the sum of these four. Real GDP is what's being produced, and we're worried about what's being spent. Remember when we define GDP previously, we used an expenditures approach where we defined it as everything that's being spent consumption, investment, government purchases in that export. So those are our aggregate expenditures in our economy. So what we wanna do is find that balance between how much we should produce in the economy and how much is being spent in the economy at that level of production. So, let's go ahead and check this out. Let's go ahead and calculate aggregate expenditures at these different levels. So, let me grab my calculator here and buy calculator. I mean, cell phone. So let's go ahead and do the first one here at a level of Real GDP of 16,000. Well, there's this much consumption, 12,400 plus our investment, 3500. Government purchases 3200 minus 1000. Net exports gets us to 18,100. So, notice our aggregate expenditures and Real GDP are not an equilibrium here, Right? They don't equal each other, there's more spending in the economy than there is production. So, if we increase the production to 18,000, well, there's gonna be a little more consumption because there's more money being made and we're keeping the other things constant here. So let's go ahead and see at a level of 18,000. Do we reach our equilibrium? 13,700 in consumption plus 3500 plus 3200 minus 1000. That gets us to aggregate expenditures of 19,400 here, right, 19,400. So, we're still not an equilibrium, there's still more spending than there is production. So, we up production again, let's see what happens when there's 20,000 of production. We're gonna have 15,000 in consumption plus 3500 plus 3200 minus 1000 That gets us to 20,700. We're getting close here, right, 20,700. But it's a little more, there's still a little more spending than there is um production in the economy. Remember we're thinking of real GDP as our production in the economy. What's being produced and aggregate expenditures as what is being spent in the economy? Alright, so we want to match these up, let's go ahead and try the next 1, 38,300 in consumption plus 3500 plus 3200 minus 1000. Well, what do you know, eventually it works out how, how come these numbers work, so? Well, for us, who knows? Well, this is what we've got, we've got an equilibrium here at 22,000 of production. We have our equilibrium amount of aggregate expenditures as well. Okay, so real GDP and aggregate expenditures are equal at this state. So what does that mean? Everything produced during this, during this year at a level of 22,000 will be purchased right? With 22,000 of spending. So let's go ahead and round out our table here with the last one at Real GDP of 24,000. Well, there's 17 600 in consumption plus 3500 plus 3200 minus 1000. That's 23,300 notice in this case? Well, there's less spending right now, we're at a point where there's less spending than there is production. So there's things being produced that are not being purchased. So what's happening in these first years where we're spending more than we're producing, What's happening is we're digging into our inventories maybe in previous years, we had produced things that we hadn't sold, Well, we're gonna start selling those things that have been produced previously. Not produced this year, produced previously, but are being sold this year. So what's happening to our inventories? These are called unplanned changes in inventory because we didn't expect this to happen. Right? So they're unplanned changes, meaning the spending was 18,100 when Real GDP was 16,000, Right, We didn't we didn't we would have produced everything that we would sell, Right, a business wants to produce just as much as they would sell. They don't wanna overproduce or under produced, they want to have just the right amount. So this would be an unplanned change And this would be -2100, right? This would be the 18,100 minus what's produced of 34,100 minus 16,000 is 2100. That's coming out of inventories, Right. We're taking stuff from previous years selling it now. So what about the next 1, 19,400 was purchased, were only 18,000 was produced. So, we have an unplanned change of inventory of 1400 in this case, Right. 1400 worth of goods are being pulled out of inventories. And in the next case, what we're still spending more than we're producing. So, again, we're pulling out of inventory 700 now, in our equilibrium, look what happens, we bought everything that was produced this here. So there's no change in inventory where we're in equilibrium, we're selling everything that was produced. And finally, in the final case, well, they're producing more than they're spending. Right, The production is more than the spending, so they produce things that were not sold. So those things that were not sold are going to be in our inventories now. So there's an unplanned increase in the inventories? In this case? So what does that matter? How does this idea of the inventory, The unplanned changes of these inventories? How does that work into this model? Well, let's think about our equilibrium first when we're in equilibrium down here. If E equals GDP right, our equilibrium. Well, this, this means that inventories do not change, right? Just like we saw there in our example, everything produced is sold and the economy is an equilibrium. But if we're not an equilibrium, we're gonna be moving towards our equilibrium, things are gonna start adjusting in the economy to try and make our way to equilibrium. So in this first case, if if aggregate expenditures is less than GDP, So what's happening in this situation? Remember aggregate expenditures is spending and this is production, Right? So production is more right than what we purchased is not everything that was produced. Like in this final case where there's 24,000 produced, 23,300 spent, right? So there's more being produced. Well, inventories increase in this case, right? Because not everything was sold. So what happens if these inventories increase? Well, in future years, we're not gonna need to produce that inventory, right? It's already being produced this year. So what's gonna happen to GDP and employment? Well, they're gonna decrease in future years in future years, that the economy is gonna start to adjust and we're gonna lay people off, we're like, hey, we've got too much inventory. We don't need people producing more stuff. We've already got inventories left over so that there will be less employment, less GDP um leading to a decrease, trying to find that equilibrium level, right? Because um The economy is always gonna be adjusting to find equilibrium there. So in this case the purchases are less than production, right? So the opposite happens in these first few examples 16,018,000. In these cases the spending is more than GDP, right? The spending is more than what's being produced. So in these cases the inventories decreased, right? We're pulling things that were produced in previous years and we're selling them this year. So in this case, let me get out of the way. So in this case, what's gonna happen to GDP and employment? Well, we're gonna see the firms are seeing that their inventories are falling, there's a bunch of purchases being made, they're going to increase their production and when they increase their production, their increasing GDP. And to do that to do that, they're gonna need to hire more people. Right? So in those cases it's increasing while we're finding our equilibrium G. D. P. So purchases in this case are more than production I wrote less than than production. So purchases are less than production, purchases are more than production in that case. Okay, so this is how the aggregate expenditures model works. We're trying to find the equilibrium being between what's being produced in the economy and what's being purchased, right? The spending in the economy. Those aggregate expenditures. Cool. So let's go ahead and move on to the next video.