Cambridge International as and a level Economics Ebook

Net exports: 
exports minus imports.
KEY TERM
Income determination
Changes in income
Th
e level of income in an economy is determined where 
aggregate expenditure is equal to output. If aggregate 
expenditure exceeds current output, fi rms will seek 
to produce more. Th
ey will employ more factors of 
production and GDP will rise. Whereas if aggregate 
expenditure is below current output, fi rms will reduce 
production. So output will change until it matches 
expenditure as shown in 
Figure 9.16.
Th
e diagram is oft en referred to as the Keynesian 45° 
diagram. It measures money GDP on the horizontal axis 
and aggregate expenditure equals national income (GDP). 
Output is determined where the 
C
+
I
+
G
+
(
X
− 
M
) line 
cuts the 45 degree line.
If aggregate expenditure rises, perhaps because 
consumption and investment increase due to greater 
optimism, output will increase.
 Figure 9.17 
shows GDP 
increasing from 
Y
to 
Y
1
.
TOP TIP
Remember that, while an aggregate demand curve shows 
total spending at diff erent price levels, an aggregate 
expenditure curve shows total spending at diff erent 
income levels.
Withdrawals and leakages
For income to be unchanged it is also necessary for 
injections 
of extra spending into the circular fl ow of income 
0
Aggregate expenditure
Money GDP
Expenditure (
Ex
) = Income (
Y
)
Y
C + I + G + 
(
X – M
)
 
45
°
Figure 9.16 
The Keynesian 45° diagram
0
Aggregate expenditure
Money GDP
Ex 
= 
Y 
Y
Y
1
C + I + G + 
(
X – M
)
45
°
C
1
 
+ I
1
 + G + 
(
X – M
)