2.2.1: Characteristics of AD

• Components of Aggregate Demand

  Consumption

  Investment

  Government Expenditure

  Net Trade (Exports - Imports)
• Formula of Aggregate demand

  Consumption + Investment + Government Expenditure + (Exports - Imports)
• Consumption: Consumer spending on goods and services. Makes up about 60% of AD
• Investment: Spending by businesses on capital goods e.g buildings and stocks. Makes up about 15% of AD
• Government Expenditure: Spending by the government on providing goods and services, generally public goods. Makes up about 20% of AD
• Net trade: Exports minus imports. Makes up around 5% of AD
• Reasons why AD curve is downward sloping

  Income effect: As prices rise, income does not match it immediately, causing less demand

  Substitution effect: if UK prices rise, less foreigners buy UK goods and more UK residents but foreign goods, reducing AD

  Real Balance Effect: Rise in prices means savings are worth less, so people will save more
• Movement along the AD curve is caused by changes in price
• Some factors e.g interest rates may both shift or cause movement along the AD curve