Answer to Question #202097 in Macroeconomics for Nimra Shahzad

Question

 Considering a three sector economy, i.e., Y = C + I + G, derive the expression for output (Y) 
 
and aggregate demand (AD).                        

Answer 1

According to the expenditure approach, it calculates the GDP by evaluating the sum of all the final goods and services purchased in an economy. GDP is identified as "Y" in the equation form, which includes Consumption (C), Investment (I), and Government Spending.

Y=C+I+G is the equation representation of the GDP, where,

• Consumption is the largest GDP component in the economy that consists of private expenditures (household expenditures) in the economy. 
• Investment includes the business investment in equipment's. Spending by the households on new houses is also considered as Investment.
• Government Spending is the total sum of all the government expenditures on all final goods and services . It includes the salaries paid to the public servants, the purchase of weapons for the army, and any investments made by the government.

Aggregate demand (AD) is referred to as the total demand for all the final goods and services in an economy during a specific time period. It is basically the sum of all the demand in the economy. It is the demand of all Gross Domestic Product (GDP)

The calculation of the Aggregate demand can be represented as 

AD=C+I+G

where C is Consumption, I is Investment and G is Government Spending

The sum of all demand in an economy takes into account all the given factors.

• Consumption is considered as the largest component of the Aggregate Demand. Consumption is the amount that the consumers spend in an economy. Taxes also play a role in the change in consumption
• Investment also constitute a large portion of Aggregate demand and is referred to as Gross Domestic Fixed Capital Formation. Investment is the money spent by firms on capital investment.
• Government Spending is the expenditure by the Government , this includes welfare, education, military and social service. A government uses the fiscal policy to alter this spending.