An Introduction to Aggregate Demand
- Aggregate demand (AD) is the total demand for all goods and services in an economy at any given average price level
- Its value is often calculated using the expenditure approach
- AD = Consumption (C) + Investment (I) + Government spending (G) + (Exports-Imports) (X-M)
- AD = C + I + G + (X-M)
- Consumption is the total spending on goods and services by consumers (households) in an economy
- Investment is the total spending on capital goods by firms
- Government spending is the total spending by the government in the economy
- Includes public sector salaries, payments for provision of merit and public goods etc.
- It does not include transfer payments
- Net exports are the difference between the revenue gained from selling goods or services abroad and the expenditure on goods or services from abroad
- Individuals, firms and governments export and import
- Individuals, firms and governments export and import
- The relationship between the average price level and the total output in an economy is shown with an aggregate demand (AD) curve
Diagram: Aggregate Demand (AD) Curve for an Economy
Average Price Level on the Y axis and Real GDP or Real National Output on the X axis