Aggregate Demand

Aggregate Demand (AD) is the total demand for goods and services produced within the economy over a period of time.

Aggregate Demand (AD) is composed of various components

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

 

AD slopes downwards because:

 

Shifts in the Aggregate Demand curve

ad

 

Graph to show Increase in AD

An increase in AD (shift to the right of the curve) could be caused by a variety of factors

1. Increased Consumption:

Consumer Expenditure accounts for about 66% of AD and therefore is a very important component of AD

 

2. Increased Investment

3. Increased G

4. Increased X

5. Decreased M

 

Components of AD

AD

 

Components of Aggregate Demand as %

components-ad

A graph showing components of AD as a %

In the above charts, I left out 2 minor factors NPISH and change in inventories to make it simpler.

TABLE 3 - UK GDP
COMPONENTS OF DEMAND - £bn, 2006 prices
Final consumption expenditure Change in inventories
HH NPISH1 Government GFCF2 Exports3 Imports3 Real GDP4
ABJR HAYO NMRY NPQT CAFU IKBK IKBL ABMI
2007 890.9 36.6 310.6 253.6 7.8 417.5 467.6 1449.9
2008 878.0 35.8 315.6 241.4 1.7 422.9 462.0 1433.9
2009 847.0 34.5 315.4 209.1 -12.5 382.9 405.5 1371.2
2010 857.4 34.9 320.1 215.6 4.9 411.1 440.4 1399.9
2011 850.6 34.1 320.3 213.0 5.6 430.0 445.7 1409.0

 

Source: HM Treasury Data    

 

AD slopes downwards because: Notes
1 Non-profit institutions serving households.
2 Gross fixed capital formation. - Investment
3 Goods and services.
4 GDP at constant (2006) market prices
Related

Essays and Revision Notes on Economic Growth