2.2.2

Components of Aggregate Demand

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Components of Aggregate Demand (AD)

Aggregate Demand (AD) is defined as the total value of planned expenditure on goods and services produced in an economy in a given period of time.

Components of AD

Components of AD

  • The formula for AD is AD = C + I + G + (X-M).
    • C is Consumption.
    • I is Investment.
    • G is Government Spending.
    • X is Exports.
    • M is Imports.
Consumption

Consumption

  • A number of factors affect the level of consumption (C):
    • Wealth levels.
    • Income levels.
    • Future expectations of inflation.
    • Animal spirits (confidence).
    • Unemployment levels.
    • Job security.
Types of investment

Types of investment

  • Investment is defined as expenditure that increases the capital stock of a country.
  • Investment in physical capital would be expenditure by firms on plant and machinery.
  • Investment in human capital is expenditure by firms on the skills of its workers e.g. training programs.
Factors affecting investment

Factors affecting investment

  • A number of factors affect the level of investment:
    • Interest rates.
    • Future growth and demand.
    • Profitability.
    • Government policies e.g. corporate tax, subsidies.
    • Efficiency of financial system.
Types of government spending

Types of government spending

  • Government spending could be on current spending or capital spending:
    • Current spending is on transfer payments such as benefits, or on the day to day running of government e.g. salaries, utility bills.
    • Capital spending is on long-term spending that increases the productive capacity of the economy e.g infrastructure projects.
Government spending

Government spending

  • A number of factors affect the level of government spending:
    • Cost of borrowing.
    • Fiscal deficit or debt targets.
    • Levels of national debt.
    • State of the economy.
    • Confidence in the economy.
    • Political bias.
Exports and imports

Exports and imports

  • A number of factors affect the level of exports and imports:
    • The exchange rate determines relative prices of exports and imports.
    • The quality of goods affects international competitiveness.
    • Relative inflation rates affect domestic vs international prices.
    • Relative levels of income. The higher the domestic income, the higher the marginal propensity to import.
    • How much spare capacity there is to supply resources. The less there is, the more raw materials will need to be imported.
Jump to other topics
1

Microeconomics

1.1

Competitive Markets: Demand & Suply

1.1.1Markets & Demand1.1.2Diminishing Marginal Returns1.1.3Supply1.1.4Market Equilibrium1.1.5Price Mechanism1.1.6Consumer & Producer Surplus1.1.7IB Multiple Choice - Demand1.1.8IB Multiple Choice - Supply
1.2

Elasticity

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1.3

Government Intervention

1.3.1Indirect Taxes & Subsidies1.3.2Application Question - Taxing Prices or Quantities1.3.3Subsidies & Price Controls1.3.4Deadweight Loss & Government Intervention1.3.5Elasticity & Tax Incidence1.3.6IB Multiple Choice - Government Intervention
1.4

Market Failure

1.4.1Types of Market Failure1.4.2Introduction to Externalities1.4.3Negative Externalities1.4.4Policy for Negative Externalities1.4.5Positive Externalities1.4.6The Deadweight Welfare Loss of Externalities1.4.7Case Study - The Externalities of Education1.4.8Public Goods & the Free-Rider Problem1.4.9Asymmetric Information1.4.10End of Topic Test - Market Failure1.4.11Application Questions - Market Failure
1.5

HL: Theory of the Firm & Market Structures

1.5.1Theory of the Firm & Market Structures
2

Macroeconomics

2.1

The Level of Overall Economic Activity

2.1.1The Circular Flow of Income2.1.2Defining GDP2.1.3Limitations of GDP2.1.4IB Multiple Choice - Economic Indicators2.1.5Business Cycles2.1.6Output Gaps
2.2

Aggregate Demand & Aggregate Supply

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2.3

Macroeconomic Objectives

2.3.1Introduction to Unemployment2.3.2Limitations of Unemployment2.3.3Types of Unemployment2.3.4Causes & Impact of Unemployment2.3.5Defining Inflation2.3.6Measuring Inflation2.3.7Use of Index Numbers2.3.8The Consumer Price Index2.3.9Consequences of Inflation2.3.10Causes of Inflation2.3.11Inflation & Unemployment Tradeoff2.3.12The Short-Run Phillips Curve2.3.13The Long-Run Phillips Curve
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Economic Growth, Poverty & Inequality

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2.5

Fiscal Policy

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2.6

Monetary Policy

2.6.1Objectives of Monetary Policy2.6.2Monetary Policy Implementation2.6.3Monetary Policy & AD-AS Model2.6.4Monetary Policy Lags & Pitfalls
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3

The Global Economy

3.1

International Trade

3.1.1Globalisation3.1.2Globalisation for LEDCs3.1.3Globalisation for MEDCs3.1.4Comparative Advantage & Trade3.1.5Protectionism3.1.6Arguments for Protectionism3.1.7Arguments Against Protectionism3.1.8End of Topic Test - Globalisation & Trade3.1.9Case Study - Globalisation & Trade
3.2

Exchange Rates

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3.3

The Balance of Payments

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3.4

Economic Integration

3.4.1Customs Unions & WTO3.4.2Merged Currency
3.5

Terms of Trade

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3.6

Economic Development

3.6.1Factors Influencing Growth & Development3.6.2International Institutions3.6.3Measures of Development3.6.4Barriers to Development3.6.5Case Study - The Bottom Billion3.6.6End of Topic Test - Emerging & Developing
3.7

The Role of Domestic & International Factors

3.7.1Interventionist Strategies3.7.2Development Strategies3.7.3Development Promotion Policies3.7.4End of Topic Test - Growth & Global Development3.7.5Application Questions -Growth & Global Development
3.8

The Role of International Trade

3.8.1International Institutions3.8.2End of Topic Test - Globalisation & Trade
3.9

The Role of Foreign Aid

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Practice questions on Components of Aggregate Demand

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  1. 1
    Which of the following would lead to an increase in aggregate demand?Multiple choice
  2. 2
    What term refers to spending on capital?Multiple choice
  3. 3
    Factors affecting investment:Fill in the list
  4. 4
    Factors affecting government spendingTrue / false
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The Aggregate Demand Curve

Shape of the Aggregate Demand Curve