Aggregate Demand

Aggregate Demand

the total spending on goods and services in a period of time at a given price level

What are the components of AD?

• Consumption (C)

• Investment (I)

• Government spending (G)

• Net exports (X-M)

Consumption

the total spending by customers on domestic goods and services

Investment

the addition of capital stock to the economy carried out by firms.

Exports

domestic goods and services that are bought by foreigners.

• selling exports to foreigners - inflow of export revenues to the country

Imports

goods and services that are bought from foreign producers

• buying imports from foreign producers - outflow of import expenditure

Trade surplus

when net exports (X-M) are positive

• export revenues > import expenditure

• shift AD to the right

Trade deficit

when net exports (X-M) are negative

• import expenditure > export revenues

• shift AD to the left

What causes a shift in AD

a change in any of the components of AD

Determinates of Consumption

1. Changes in income taxes

2. Changes in interest rates

3. Changes in wealth

   • Change in house prices

   • Change in the value of stocks and shares

4. Changes in consumer confidence/expectations

   • Economic future

   • Future price levels

5. Level of household indebtedness

Determinates of Investment

1. Changes in interest rates

2. Changes in business taxes

3. Technological changes

4. Changes in business confidence/expectations

5. Levels of corporate indebtedness

Determinates of Net Exports

1. Changes in the level of exports

   • Foreign incomes

   • Exchange rates

   • Trade policies

   • Inflation rates

2. Changes in the level of imports

   • National income

   • Exchange rates

   • Trade policies