Aggregate demand, often shortened to just AD, is the total demand for goods and services in an economy at a given price level. No longer are we looking at just individual markets, but the demand in the economy as a whole. When we say price level, we are referring to the average price of products produced in the economy. Price levels go up and we have inflation, which will be explained in a later post.
Aggregate demand is made up of 5 components. These 5 components are consumer expenditure (C), investment (I), government spending (G) and net exports [exports (X) - imports (M)]. Therefore, aggregate demand equals C + I + G + (X - M). Each component will be detailed individually in later posts, but i'll give a brief description of each here.
- Consumer expenditure - This is often called consumption, it is spending by households on products and generally makes up the biggest proportion of aggregate demand.
- Investment - This is spending on capital goods, such as machinery and delivery vehicles. It's the most volatile component.
- Government spending - This is government injecting money into economy through spending on things such as the NHS.
- Exports - Simply put, the value of goods we sell abroad.
- Imports - The opposite of above, the value of goods we buy from abroad.