Aggregate demand

What is aggregate demand?

The total of all demands or expenditures in the economy at any given price and time

What does national expenditure calculate?

National income - usually measured as GDP

What are the four components that make up national expenditure?

1) Consumption C

2) Investment i

3) Government spending G

4) Export minus imports (X-M)

What do we mean by consumption? 

This is spending by households on goods and services 

What do we mean by investment?

This is spending by firms on investment goods

What do we mean by government spending?

This includes current spending, for instance on wages and salaries

It also includes spending by government on investment goods like new roads or new schools

What do we mean by exports minus imports?

• Foreigners spend money on goods produced in the domestic economy

• Households, firms and governments also spend money on goods produced abroad - these imported goods do not form part of national output and do not contribute to national income

• Because C I G X include spending on imported good M must been taken away to get the figure for national expenditure

Equation for national expenditure/ aggregate demand

AD = C + I + G + X - M

What does the aggregate demand curve show?

The relationship between the price level and the level or real expenditure in the economy 

What is put on the vertical axis of AD demand curve?

Real output

What is put on the horizontal axis of a demand curve?

Real output

What is the price level?

The average level of prices in the economy 

Give an example of a measure the government use to calculate price level?

Consumer Prices Index

• figures for which are published every month

• Widely reported to the news

What is a change in price level?

Inflation

What must real output equal on the diagram? why? 

Real expenditure and real income 

Because in the circular flow model of the economy these are different ways of measuring the same flow

What does the AD curve plot?

The level of expenditure where the economy would be in an equilibrium position at each price level, all other things being equal

What is investment? 

Spending by firms on capital 

What does an increase of investment effect AD?

• Shifts AD to right in the short run

• Helps improve the quality and quantity of factors of production in the long run

Weakness of investment

It is the most volatile component of AD

Investment is also known as what?

Business investment 

What happens as the price levels rise?

The equilibrium level of national income falls

What does aggregate mean?

The sum or total

What is the largest component of expenditure?

Household consumption 

• 60% in 2012

How much does government spending account for?

23%

How much does investment account for?

15%