2.2 Aggregate demand

Aggregate Demand (AD)

Total demand for goods/services at a price level.

Expenditure Approach

Method to calculate AD using spending components.

Consumption (C)

Total spending by households on goods/services.

Investment (I)

Spending on capital goods by firms.

Government Expenditure (G)

Total government spending excluding transfer payments.

Net Trade (X-M)

Difference between exports and imports.

Economic Growth

Increase in AD indicates economic growth.

AD Curve

Graph showing relationship between price level and output.

Interest Rate Effect

Higher prices lead to higher interest rates.

Wealth Effect

Increased prices decrease purchasing power, reducing AD.

Exchange Rate Effect

Lower prices can increase exports, boosting AD.

Movement Along AD Curve

Change in price level causes movement along curve.

Shift of AD Curve

Change in determinants shifts entire AD curve.

Determinants of AD

Factors causing shifts in aggregate demand.

Disposable Income

Income remaining after taxes and transfers.

Savings Ratio

Proportion of income saved by households.

Impact of Taxes

Higher taxes reduce disposable income.

Impact of Wages

Lower wages decrease disposable income.

Transfer Payments

Payments to households increase disposable income.

Consumption-Savings Relationship

Increased savings typically decrease consumption.

UK Government Spending

25% of AD, varies by country.

Consumption Contribution in UK

Approximately 60% of AD in the UK.

Investment Contribution in UK

Approximately 14% of AD in the UK.

Net Exports Contribution in UK

Approximately 1% of AD in the UK.

Impact of Consumption Increase

1% increase significantly boosts economic growth.

Lockdown Savings Ratio

UK savings ratio peaked at 25% during lockdown.

Interest Rates

Rates set by Central Bank affecting lending and saving.

Base Rate

Central Bank's benchmark interest rate for loans.

Consumer Spending

Total expenditure by households on goods/services.

Consumer Confidence

Consumer's optimism about economic stability and jobs.

Gross Investment

Total spending on capital goods by firms.

Net Investment

Gross investment minus depreciation of capital goods.

Depreciation

Decrease in asset value over time.

Profit Maximisation

Business objective to achieve highest possible profit.

Access to Credit

Availability of loanable funds for investment.

Animal Spirits

Investor sentiment influencing economic decisions.

Government Expenditure

Spending by government on public services and goods.

Trade Cycle

Fluctuations in economic activity over time.

Fiscal Policy

Government policy regarding taxation and spending.

Net Trade Balance

Difference between exports and imports (X-M).

Exchange Rates

Value of one currency in terms of another.

Price Elasticity of Demand

Sensitivity of quantity demanded to price changes.

Marshall-Lerner Condition

Condition for trade balance improvement after currency depreciation.

J Curve

Short-term worsening of trade balance post-devaluation.

Subsidies

Financial support from government to encourage investment.

Protectionism

Government policies restricting imports to protect domestic industries.

Consumer Savings

Portion of income not spent on consumption.

Loan Repayment

Monthly payment made towards a borrowed amount.

Investment Decisions

Choices made by firms regarding capital allocation.

Demand for Exports

Desire for domestic goods by foreign consumers.

Government Regulations

Rules imposed by government affecting business operations.