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Aggregate demand is an economic measurement of the sum of all final goods and
services produced in an economy, expressed as the total amount of money
exchanged for those goods and services. Since aggregate demand is measured
through market values, it only represents total output at a given price level, and does
not necessarily represent quality or standard of living.
Read more: Aggregate Demand Definition |
Investopedia http://www.investopedia.com/terms/a/aggregatedemand.asp#ixzz4IbiM
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Total level of demand for desired goods and services (at any time by all groups within a
national economy) that makes up the gross domestic product (GDP). Aggregate demand is
the sum of consumption expenditure, investment expenditure, government expenditure, and
net exports.
Read more: http://www.businessdictionary.com/definition/aggregate-demand.html
assume that Ms, G, and T are fixed. What we want to know is, with these things fixed,
how will AD change as P changes?
What does P (the price level) affect? First, remember that your transactions demand
for money depends on Y, r and P. When prices decrease, the demand for money
balances decreases, and when prices increase, the demand for money balances
increases. (Go back to section 3.2 if you've forgotten this.)
So if P rises Md rises, if P falls Md falls. If Md rises, r rises and Ip falls. If Md falls, r
falls and Ip rises.
So we've found a connection through the demand for money balances:
If P increases, Md increases, r rises, Ip falls and hence AD falls.
If P falls, Md falls, r falls, Ip rises and hence AD rises.
There are two additional reasons that we expect aggregate expenditures in the goods
market to increase as the price level drops. Both involve slightly fancier theory than
we've been using so far.
The first additional reason is that as P falls, causing Md to decrease and r to decrease,
the impact of a fall in r might be felt not only in planned investment (Ip) but also in
consumption (C).
As the interest rate falls, consumers may decide that it is not worth it to save as much
at the going income level (since they do not receive as much return when they take
these savings to bond markets), or decide that since it is now cheaper to borrow, they
will consume more and borrow from credit card companies to finance this
consumption. Thus, as r decreases, we might expect to see C rise as well, adding to
the increase in expenditures generated by P decreasing. (Obviously now C is not just a
function of Y, but is affected by r too, making our model more complicated.)
The second additional reason has to do with "wealth effects." If goods prices fall but
the value of your assets don't, you feel wealthier and may start consuming more.
Additionally if r falls, the value of any bonds you hold rises, and that will make you
feel wealthier, and you'll consume more.
So we've provided three reasons why a fall in the price level might induce a larger
amount of aggregate expenditures.
Graphically, this is a way of saying that the AD curve slopes down as a function of
the price level.
Having shown that AD slopes down as a function of P, we need to see how it will
shift as one of the factors we have held constant (G, T, or Ms) changes.
We already know from our previous analysis that:
a) an increase in G
b) a decrease in T
c) an increase in Ms
Will cause Y to increase at the going price level.
Thus, if G increases, T decreases, or Ms increases, Y increases at the current price
level -- graphically, the AD curve shifts out.
Similarly, a decrease in G, an increase in T, or a decrease in Ms will cause AD to shift
in.
http://faculty.washington.edu/danby/notes/notes14.html
In macroeconomics, the focus is on the demand and supply of all goods and services
produced by an economy. Accordingly, the demand for all individual goods and services
is also combined and referred to asaggregate demand. The supply of all individual
goods and services is also combined and referred to as aggregate supply. Like the
demand and supply for individual goods and services, the aggregate demand and
aggregate supply for an economy can be represented by a schedule, a curve, or by an
algebraic equation
The aggregate demand curve represents the total quantity of all goods (and services)
demanded by the economy at differentprice levels. An example of an aggregate demand
curve is given in Figure .
The vertical axis represents the price level of all final goods and services. The
aggregate price level is measured by either the GDP deflator or the CPI. The horizontal
axis represents the real quantity of all goods and services purchased as measured by
the level of real GDP. Notice that the aggregate demand curve, AD, like the demand
curves for individual goods, is downward sloping, implying that there is an inverse
relationship between the price level and the quantity demanded of real GDP.
The reasons for the downwardsloping aggregate demand curve are different from the
reasons given for the downwardsloping demand curves for individual goods and
services. The demand curve for an individual good is drawn under the assumption that
the prices of other goods remain constant and the assumption that buyers' incomes
remain constant. As the price of good X rises, the demand for good X falls because the
relative price of other goods is lower and because buyers' real incomes will be reduced
if they purchase good X at the higher price. The aggregate demand curve, however, is
defined in terms of the price level. A change in the price level implies that many prices
are changing, including the wages paid to workers. As wages change, so do incomes.
Consequently, it is not possible to assume that prices and incomes remain constant in
the construction of the aggregate demand curve. Hence, one cannot explain the
downward slope of the aggregate demand curve using the same reasoning given for the
downwardsloping individual product demand curves.
A shift to the right of the aggregate demand curve. from AD 1 to AD 2, means that at the
same price levels the quantity demanded of real GDP has increased. A shift to the left of
the aggregate demand curve, from AD 1 to AD 3, means that at the same price levels the
quantity demanded of real GDP has decreased.
Changes in aggregate demand are not caused by changes in the price level. Instead,
they are caused by changes in the demand for any of the components of real GDP,
changes in the demand for consumption goods and services, changes in investment
spending, changes in the government's demand for goods and services, or changes in
the demand for net exports.
Consider several examples. Suppose consumers were to decrease their spending on all
goods and services, perhaps as a result of a recession. Then, the aggregate demand
curve would shift to the left. Suppose interest rates were to fall so that investors
increased their investment spending; the aggregate demand curve would shift to the
right. If government were to cut spending to reduce a budget deficit, the aggregate
demand curve would shift to the left. If the incomes of foreigners were to rise, enabling
them to demand more domesticmade goods, net exports would increase, and
aggregate demand would shift to the right. These are just a few of the many possible
ways the aggregate demand curve may shift. None of these explanations, however, has
anything to do with changes in the price level.
https://www.cliffsnotes.com/study-guides/economics/aggregate-demand-andaggregate-supply/aggregate-demand-ad-curve
AS-AD Model
The Aggregate Supply-Aggregate Demand Model shows how equilibrium is determined
by supply and demand. It shows how increases and decreases in output and prices
impact the economy in the short-run and long-run. The model is also used to show real
and potential output.
When price increase dominates an economy, this means that the economy is near its potential output.
Reasons for Aggregate Demand Shift
The slope of the aggregate demand curve shows the extent to which the real balances change the
equilibrium level of spending. The aggregate demand curve shifts to the right as a result of monetary
expansion. In an economy, when the nominal money stock in increased, it leads to higher real money
stock at each level of prices. The interest rates decrease which causes the public to hold higher real
balances. This stimulates aggregate demand, which increases the equilibrium level of income and
spending. Likewise, if the monetary supply decreases, the demand curve will shift to the left.
Source: Boundless. Reasons for and Consequences of Shift in Aggregate Demand. Boundless
Economics. Boundless, 26 May. 2016. Retrieved 28 Aug. 2016
from https://www.boundless.com/economics/textbooks/boundless-economics-textbook/aggregatedemand-and-supply-24/the-aggregate-demand-supply-model-110/reasons-for-and-consequences-of-shiftin-aggregate-demand-422-12519/
CONSUMPTION
his is made by households, and sometimes consumption accounts for the larger portion of
CONSUMER CONFIDENCE
If consumers are confident about their future income, job stability, and the economy is growing and
stable, spending is likely to increase. However, any job insecurity and uncertainty over income is
likely to delay spending. An increase in consumer confidence shifts AD to the right.
INTEREST RATES
Lower interest rates tend to increase consumption because larger goods are usually purchased on
credit and if interest rates are low, then its cheaper to borrow. Consumers mostly borrow to
buy houses, which is one of the biggest purchases and lower interest rates means lower mortgage
payments, so households can spend more on other goods. Some Economists argue that lower interest
rates also make saving less attractive, but there is no real evidence. So, lower interest rates increase
Aggregate Demand.
CONSUMER DEBT
If a consumer has a lot of debt, he is unlikely to buy more since he would have to pay his debt off
first. Low consumer debt increases consumption and aggregate demand.
WEALTH
Wealth are assets held by a household, such as property or stocks. An increase in property is likely
increase to consumption.
INVESTMENT
nvestment, second of the four components of aggregate demand, is spending by firms on capital,
not households. Investment is the most volatile component of AD. An increase in investment shifts
AD to the right in the short run and helps improve the quality and quantity of factors of
production in the long run.
Firms borrow from banks to make large capital intensive purchases, and if the interest rate
decreases, it becomes cheaper for firms to invest and provides incentive for firms to take risk.
BUSINESS CONFIDENCE
If firms are confident about the economy and its future growth, they are more likely to invest in
capital, new projects and buildings/machinery.
INVESTMENT POLICY
If governments provide incentives such as tax breaks, subsidies, loans at lower interest rates then
investment can increase. However, corruption and bureaucracy deters investment.
NATIONAL INCOME
As firms increase output, they would need to invest in new machines. This relationship is known
as The Accelerator. The assumption behind the accelerator is that firms will want to main a fixed
capital to output ratio, meaning that if a factory uses one machine to produce 1000 goods, and the
firms needs to produce 3000 goods more, then the firm will buy 3 more machines.
GOVERNMENT SPENDING
overnment spending forms a large total of aggregate demand, and an increase in government
spending shifts aggregate demand to the right. Government spending is categorized into transfer
payments and capital spending. Transfer payments include pensions and unemployment benefits
and capital spending is on things like roads, schools and hospitals. Governments spend to increase
the consumption of health services, education and to re-distribute income. They may also spend
to increase aggregate demand.
NET EXPORTS
mports are foreign goods bought by consumers domestically, and exports are domestic goods
bought abroad. Net exports is the difference between exports and imports, and this component can
be net imports too, if imports are greater than exports. An increase in net exports shifts aggregate
demand to the right. The exchange rate and trade policy affects net exports.
https://www.intelligenteconomist.com/components-of-aggregate-demand/
Aggregate means total and in this case we use the term to measure how much is
being spent by all consumers, businesses, the government and people and firms
overseas.
Aggregate demand (AD) = total spending on goods and services
The formula for calculating aggregate demand is as follows:
AD = C + I + G + (X-M)
C: Consumers' expenditure on goods and services: Also known as consumption, this
includes demand for durables e.g. audio-visual equipment and vehicles & non-durable
goods such as food and drinks which are consumed and must be re-purchased.
I: Capital Investment This is spending on capital goods such as plant and equipment
and new buildings to produce more consumer goods in the future. Investment includes
spending on working capital such as stocks of finished and semi-finished goods.
Capital investment spending in the UK accounts for between 15-20% of GDP in any
given year. Of this investment, 75% comes from private sector businesses such as
Tesco, British Airways and British Petroleum and the remainder is spent by the
government for example building new schools or in improving rail or road networks.
Investment has important effects on the supply-side as well as being an important
component of AD.
A small part of investment spending is the change in the value of stocks. Producers may
find either than demand is running higher than output (i.e. stocks will fall) or that
demand is weaker than expected and below current output (in which case the value of
stocks will rise.)
G: Government Spending This is spending on state-provided goods and services
including public goods and merit goods. Decisions on how much the government will
spend each year are affected by developments in the economy and the political
priorities of the government.
Government spending on goods and services is around 18-20% of GDP but this tends
to understate the true size of the government sector in the economy. Firstly some
spending is on investment and a sizeable amount goes on welfare state payments.
Transfer payments in the form of benefits (e.g. state pensions and the job-seekers
allowance) are not included in current government spending because they are a transfer
from one group (i.e. people paying income taxes) to another (i.e. pensioners drawing
their state pension having retired, or families on low incomes).
X: Exports of goods and services - Exports sold overseas are an inflow of demand (an
injection) into our circular flow of income and spending adding to aggregate demand.
M: Imports of goods and services. Imports are a withdrawal of demand (a leakage) from
the circular flow of income and spending.
Net exports measure the value of exports minus the value of imports. When net exports
are positive, there is a trade surplus (adding to AD); when net exports are negative,
there is a trade deficit (reducing AD). The UK has been running a large trade deficit for
several years now.
http://www.tutor2u.net/economics/reference/aggregate-demand-ad
Significance
Consumption is the value of goods and services bought by
people. Individual buying acts are aggregated over time and
space.
Consumption is normally the largest GDP component. Many
persons judge the economic performance of their country mainly
in terms of consumption level and dynamics.
Composition
First, consumption may be divided according to the durability of the
purchased objects. In this vein, a broad classification
separates durable goods (as cars and television sets) from nondurable goods
(as
food)
and from services (as
restaurant
foot
and
and
wear
Housing
and energy
Transport
appliances
Communication
schooling