Planned Spending
Planned spending is all expenditure in the economy except for unplanned inventory investment: GDP = planned spending + unplanned inventory investment. This equation must always hold true because of the rules of national income accounting. Begin with the situation where there is no unplanned inventory investment—so GDP equals planned spending—and then suppose that planned spending decreases. Firms find that their production is in excess of their sales, so their inventory builds up. As we just argued, they respond by decreasing production so that GDP is again equal to planned spending, and unplanned inventory investment is once again zero. Thus, even though unplanned inventory investment can be nonzero for very short periods of time, we do not expect such a situation to persist. We expect instead that actual output will, in fact, almost always equal planned spending. What Happened to the Components of GDP during the Great Depression? Now let us look at how these components of GDP behaved during the 1930s. Table 7.3 “Growth Rates of Key Macroeconomic Variables, 1930–39*” presents these data in the form of growth rates. Remember that a positive growth rate means the variable in question increased from one year to the next, while a negative growth rate means it decreased.
