2.2.1 AD

• Aggregate Demand (AD)


  Represents the total demand for goods and services within an economy at a given price level and during a specific period
• Components of Aggregate Demand


  • Consumption (C)
  • Investment (I)
  • Government Spending (G)
  • Net Exports (NX)
• Consumption (C)


  Total spending by households on goods and services, influenced by disposable income, consumer confidence, interest rates, and wealth levels
• Investment (I)


  Spending by businesses on capital goods, such as machinery, equipment, and infrastructure, as well as expenditures on research and development, influenced by interest rates, business expectations, and overall economic conditions
• Government Spending (G)


  Expenditure by the government on public goods and services, like education, defense, and infrastructure, determined by fiscal policy decisions
• Net Exports (NX)


  Difference between exports (goods and services sold to foreign countries) and imports (goods and services purchased from foreign countries), a positive value indicates a trade surplus, a negative value indicates a trade deficit
• Relative Importance of Each Component

  • Consumption is typically the largest component in most developed economies { 60% of AD}
  • Investment tends to increase during times of economic growth and prosperity
  • Government spending can rise during periods of recession or when the government implements expansionary fiscal policies
  • Net exports may fluctuate depending on exchange rates, trade agreements, and the global economic situation
• Movement Along the AD Curve


  Occurs when the price level changes, causing a change in the quantity of real GDP demanded
• Shift in the AD Curve


  Happens when any of the components of aggregate demand (C, I, G, NX) change, other than the price level, reflecting a change in the overall level of real GDP demanded at various price levels
• Aggregate Demand and Economic Boom


  • In a strong economy, increased consumer spending on goods and services boosts the consumption component of AD
• Investment and Economic Downturn


  • During an economic downturn, businesses may postpone investment plans, leading to a decrease in the investment component of AD
• Government Spending and Infrastructure Projects


  • Governments can boost AD by investing in infrastructure projects, creating jobs and increasing overall demand
• Net Exports and Trade Deficits


  • A trade deficit, where a country imports more than it exports, can negatively impact net exports and reduce aggregate demand