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ABSOLUTE POVERTY LEVEL: The amount of income a person or family needs to purchase an absolute amount of the basic necessities of life. These basic necessities are identified in terms of calories of food, BTUs of energy, square feet of living space, etc. The problem with the absolute poverty level is that there really are no absolutes when in comes to consuming goods. You can consume a given poverty level of calories eating relatively expensive steak, relatively inexpensive pasta, or garbage from a restaurant dumpster. The income needed to acquire each of these calorie "minimums" vary greatly. That's why some prefer a relative poverty level.

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PHYSICAL WEALTH, AGGREGATE EXPENDITURES DETERMINANT:

One of several specific aggregate expenditures determinants assumed constant when the aggregate expenditures line is constructed, and that shifts the aggregate expenditures line when it changes. A decrease in physical wealth causes an increase (upward shift) of the aggregate expenditures line. An increase in physical wealth causes a decrease (downward shift) of the aggregate expenditures line. Other notable aggregate expenditures determinants include consumer confidence, federal deficit, inflationary expectations, and exchange rates.
The wealth of the economy comes in two basic forms--physical wealth and financial wealth. Financial wealth includes money, bank accounts, stock certificates, bonds, and other financial instruments that provide direct or indirect claims on physical goods. Physical wealth consists of houses, cars, buildings, land, property, equipment, furniture, appliances, and the whole array of tangible goods.

The key with physical wealth is that once it has been acquired, it is no longer needed. That is, once a consumer like Duncan Thurly owns a house, he has a house, and he does not need a house. Alternatively, not owning a house puts Duncan in prime position to buy a house. Or should The Wacky Willy Company purchase a new factory, then it has a factory and does not need a factory. But, not having a factory puts The Wacky Willy Company in prime position to buy a factory.

Changes in physical wealth, as such, tend to cause consumption expenditures and investment expenditures to change in the opposite direction.

  • If households and businesses have more physical wealth, then they do not need to buy what they have, and consumption expenditures and investment expenditures tend to fall.

  • If households and businesses have less physical wealth, then they do need to buy some, and consumption expenditures and investment expenditures tend to rise.
A change in the physical wealth, by changing consumption expenditures and investment expenditures, causes changes in aggregate expenditures. A boost in physical wealth decreases aggregate expenditures and causes a downward shift of the aggregate expenditures line. A drop in physical wealth then increases aggregate expenditures and causes an upward shift of the aggregate expenditures line.

What It Does

Physical Wealth
Physical Wealth

The exhibit to the right presents a standard Keynesian aggregate expenditures line. Like all aggregate expenditures lines, this one is constructed based on several ceteris paribus aggregate expenditures determinants, such as physical wealth. They key question is: What happens to this aggregate expenditures line if physical wealth changes?

More Physical Wealth

Suppose, for example, that the economy has been growing steadily for a couple of years. Real production has expanded. Disposable income has risen. And most importantly, the household sector has devoted a significant portion of consumption expenditures to the purchase of durable goods, such as cars, houses, furniture, and appliances. This accumulation of durable goods has added to the physical wealth of the household sector. With this increase in physical wealth, with this stockpile of relatively new durable goods that will be functioning for several years, the household sector is inclined to decrease consumption expenditures.

The household sector reduces consumption expenditures by increasing saving. This saving could take the form of simply diverting more disposable income into bank savings accounts or other financial assets. However, it is also likely to take the form of making payments on the loans used to purchase these durable goods. Because loan repayments are income that is NOT used to buy current production it is considering saving. The result is that this increase in physical wealth causes a decrease in consumption expenditures and subsequently a decrease aggregate expenditures.

To see how an increase in physical wealth affects the aggregate expenditures line, click the [More Wealth] button. The accumulation of physical wealth triggers a decrease in aggregate expenditures, which is a downward shift of the aggregate expenditures line.

Less Physical Wealth

Alternatively, suppose that the economy has been through a contraction. Real production has fallen. Disposable income has declined. And most importantly, the household sector has NOT purchased many durable goods, such as cars, houses, furniture, and appliances for a while. People have had to "make due" with existing durable goods. But these durable goods are wearing out, breaking down, and depreciating. In essence, the physical wealth of the household sector is decreasing. Moreover, loans used to finance previous durable good purchases are being paid off. With this decrease in physical wealth and with less outstanding debt the household sector is inclined to increase consumption expenditures, especially to purchase needed durable goods.

The household sector is able to pay for this extra consumption, even though disposable income might not be rising, by decreasing saving. This saving could take the form of simply withdrawing funds from existing bank savings accounts or "cashing in" other financial assets. However, it is also likely to take the form of getting loans through financial markets. The result is that this decrease in physical wealth causes an increase in consumption expenditures and subsequently an increase aggregate expenditures.

To see how a decrease in physical wealth affects the aggregate expenditures line, click the [Less Wealth] button. The drop in physical wealth triggers an increase in aggregate expenditures, which is a upward shift of the aggregate expenditures line.

What Does It Mean?

Physical wealth as an aggregate expenditures determinant is a key part of the business cycle. Household consumption expenditures are the largest of the four expenditure categories, comprising about two-thirds of aggregate expenditures on real production. While consumption is relatively stable compared to the extremely volatile investment, even small changes in this large expenditure category can trigger business-cycle instability. And small changes in consumption can result from changes in physical wealth.

During an expansion, the household sector accumulates physical wealth, especially in the form of durable goods. However, once this physical wealth has been accumulated, the household sector reduces consumption expenditures, often because they are paying off the debt used to buy these durable goods. The drop in consumption induces a decrease in aggregate expenditures, which can then trigger the onset of a contraction.

During the contraction, the household sector's stockpile of durable goods breaks down, wears out, and otherwise depreciates, meaning physical wealth decreases. In addition, debt used to finance the purchase of these durable goods is paid off. This entices the household sector to increase consumption expenditures, which induces an increase in aggregate expenditures, and triggers an expansion.

<= PHYSICAL WEALTH, AGGREGATE DEMAND DETERMINANTPLANNED ECONOMY =>


Recommended Citation:

PHYSICAL WEALTH, AGGREGATE EXPENDITURES DETERMINANT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2017. [Accessed: August 21, 2017].


Check Out These Related Terms...

     | aggregate expenditures determinants | interest rates, aggregate expenditures determinant | federal deficit, aggregate expenditures determinant | inflationary expectations, aggregate expenditures determinant | exchange rates, aggregate expenditures determinant | financial wealth, aggregate expenditures determinant | consumer confidence, aggregate expenditures determinant | change in aggregate expenditures | change in aggregate demand | slope, aggregate expenditures line | intercept, aggregate expenditures line |


Or For A Little Background...

     | aggregate expenditures | aggregate expenditures line | determinants | gross domestic product | consumption expenditures | investment expenditures | government purchases | net exports | Keynesian economics | effective demand | psychological law |


And For Further Study...

     | aggregate market analysis | business cycles | circular flow | monetary economics | physical wealth, aggregate demand determinant | Keynesian model | Keynesian equilibrium | injections-leakages model | aggregate demand | fiscal policy | multiplier |


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