Equilibrium Expenditure

A. Aggregate Planned Expenditure and Real GDP

Aggregate planned expenditure is the sum of planned consumption expenditure, investment, government purchases of goods and services, and exports minus imports.

B. Equilibrium Expenditure

Equilibrium expenditure is the level of aggregate expenditure that occurs when aggregate planned expenditure equals real GDP.

C. Convergence to Equilibrium

When aggregate planned expenditure and actual aggregate expenditure are unequal, production plans and spending plans are inconsistent, and a process of convergence toward equilibrium expenditure occurs.

  1. If aggregate planned expenditure exceeds real GDP, inventories decrease below their target levels. Firms increase their production to build up their inventories and GDP increases.
  2. If aggregate planned expenditure is less than real GDP, inventories increase above their target levels. Firms decrease their production to reduce their inventories and GDP decreases.