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Chapter Four
The Spending Approach to Measuring Aggregate activity
Chapter Objectives
After studying this chapter, students should be able to:
1. Understand the meaning of the spending approach to measuring national income.
2. Explain the basic economic logic behind the spending approach.
3. Identify the main components of aggregate (total) spending.
4. Explain consumption spending as the largest component of aggregate spending.
5. Understand the relationship between consumption and income.
6. Distinguish between necessary and luxury consumption.
7. Define investment spending and explain its role in economic growth.
8. Differentiate between fixed investment and inventory investment.
9. Distinguish between gross investment and net investment.
10. Explain depreciation and replacement investment.
11. Identify government spending and explain what is included and excluded from it.
12. Explain the role of government spending in the economy.
13. Understand the role of the foreign sector through exports and imports.
14. Explain the concept of net exports.
15. Recognize the importance of the spending approach in economic analysis.
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