2.2.1 The Characteristics of AD

Aggregate Demand is the total planned expenditure on goods and services produced in the UK.

A. The Components of AD

You must memorize this formula and be able to define each part:

AD=C+I+G+(X−M)AD = C + I + G + (X - M)

  • C (Consumption): Spending by households on goods and services.

  • I (Investment): Spending by firms on capital goods (factories, machinery).

  • G (Government Spending): Spending on public services (NHS, schools) and infrastructure.

  • X - M (Net Trade): Exports (injections) minus Imports (withdrawals).

B. Relative Importance

  • Consumption is King: In the UK, C accounts for roughly 60% of AD. This makes the UK economy very sensitive to changes in consumer confidence and interest rates.

  • Investment (~15%): Highly volatile; it changes rapidly based on "Animal Spirits."

  • Government Spending (~25%): Relatively stable, though it spikes during crises (e.g., pandemics).

  • Net Trade: Usually a small negative figure for the UK (we run a trade deficit).

C. The AD Curve & Movements vs. Shifts

The AD curve slopes downwards from left to right.

  • Movement Along: Caused only by a change in the general Price Level. If prices fall, Real National Output rises because of the Wealth Effect (money buys more) and the Trade Effect (our goods are cheaper for foreigners).

  • Shift: Caused by a change in any of the components ($C, I, G, X, M$) independent of the price level.

    • Shift Right: AD increases (e.g., tax cuts).

    • Shift Left: AD decreases (e.g., a global recession hitting exports).