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

  
    
 HHNPISHGovernmentGFCFExportsImportsReal GDP
ABJRHAYONMRYNPQTCAFUIKBKIKBLABMI
2007890.936.6310.6253.67.8417.5467.61449.9
2008878.035.8315.6241.41.7422.9462.01433.9
2009847.034.5315.4209.1-12.5382.9405.51371.2
2010857.434.9320.1215.64.9411.1440.41399.9
2011850.634.1320.3213.05.6430.0445.71409.0

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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By on May 16th, 2016

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