Components of Aggregate Demand

Economics: IB Diploma, topic 2.2.2

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.

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.

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.

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.