Question

In your own words, explain the logic of the income-expenditure model. What determines the amount of real GDP demanded?

Answer 1

The income expenditure model was developed by John Maynard Keynes. In his model, he used the aggregate expenditure curve to determine the amount of real GDP in the economy.

The aggregate expenditure consists of consumption expenditure by the consumers of the economy, investment expenditure (this consists of business fixed investment, residential investment, public sector investment) , government expenditure (goverment expenditure on final goods and services for defence personnel, food provision schemes of the government etc.) and net exports of the economy.

This model says that the Aggregate expenditure plays an important role in the determination of the real GDP of the economy. The logic is that the economy will produce as many goods as will sell in the market and equilibrium is reached where demand, income and consumption all match the output exactly.