Aggregate demand
- Aggregate Demand (AD) is
? - the total demand (level of expenditure) over a period of time.
- Defined by the equation: (==AD = C + I + G + (X – M)==)
- Aggregate demand = Consumption + Investment + Government expenditure + (Exports - Imports)
Components of AD
Consumption
- is spending by households
- Can be Autonomous (independent of income)
- e.g. rent, groceries
- Or induced (dependent consumption)
- changes depending on disposable income levels
- e.g. …
- Largely influenced by:
- consumer expectations
- speculators expectations about future price rises and general goods availability
- level of interest rates
- the distribution of income
- consumer expectations
- influenced by income (therefore indicates consumption):
- Average propensity to consume (APC) is :: the proportion of total income that is spent on consumption.
- Average propensity to save (APS) is :: the proportion of total income that is not spent, but is saved for future consumption.
- Consumption represents ==60%== of AD in Australia.
Investment
-
is spending by firms
- to increase productive capacity
-
influenced by:
- the cost of inputs
- Changes in interest rates
- Changes in gov policies
- profit levels (change in price and productivity of labour)
- business expectations
- changes in expected demand for their products
- changes in general economic outlook
- inflation
- the cost of inputs
-
Investment represents (approx) ==15%== of AD
Government expenditure
-
is spending by local, state and federal governments
-
influenced by:
- policy objectives of the government
- (e.g. lower inflation & unemployment)
- The general state of the economy
- policy objectives of the government
-
Government expenditure comprises of (approx) ==20%== of AD
Net foreign demand (exports - imports)
- is expenditure by foreigners (on our exports), minus expenditure on foreign g/s (imports)
- influenced by:
- the global business cycle
- exchange rate
- commodity prices
- Net foreign demand comprises (approx) ==20%== of AD