Components of Aggregate Demand

Aggregate Demand is the total demand in the economy.

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

  • C= Consumer spending (Household consumption)
  • I = Investment (gross fixed capital formation)
  • G= Government  spending (Government investment and Government consumption)
  • X-M = Net Exports (exports – imports).

AD

Components of Aggregate Demand

components-ad

A graph showing components of AD as a %

  • Household consumption is the largest component at 61%
  • Government spending is 23%
  • Investment 15%
  • Net exports – 1% (current account deficit)

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 NPISH Government GFCF Exports Imports Real GDP
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

Aggregate Demand curve

ad-downward-sloping

AD slopes downwards because:

  • At a lower price level, people are able to consume more goods and services, because their real income is higher.
  • At a lower price level, interest rates usually fall causing increased spending.
  • At a lower price level, exports are relatively more competitive than imports.

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