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).
Components of Aggregate Demand
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|
Source: HM Treasury Data
Aggregate Demand curve
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.