AGGREGATE DEMAND

• Components of Aggregate Demand (AD)


  • Consumer spending
  • Investment
  • Government spending
  • Exports minus imports
• Consumer spending


  The largest component of AD, most significant to economic growth
• Investment


  Business spending on capital goods, accounts for 15-20% of GDP in the UK
• Government spending


  Spending on state goods and services, accounts for 18-20% of GDP
• Exports minus imports

  The value of the current account on the balance of payments, the most insignificant part of AD
• Fall in price level


  Expansion in demand
• Rise in price level


  Contraction in demand
• Downward slope of AD curve


  • Higher prices lead to fall in real incomes
  • High inflation leads to more imports and higher interest rates
• Rise in AD

  Shift to the right in the demand curve
• Disposable income


  Amount of income consumers have left over after taxes and social security charges
• Marginal propensity to consume


  How much a consumer changes their spending following a change in income
• Marginal propensity to save


  Proportion of each additional pound of household income that is used for saving
• Lower interest rates


  Cheaper to borrow, reduces incentive to save, spending increases
• Consumer confidence


  How confident consumers feel about the economy, affects their spending
• Rise in house/asset prices


  Consumers feel wealthier, more willing to spend
• Gross investment


  Amount invested in business assets without accounting for depreciation
• Net investment


  Actual addition to capital stock after depreciation
• Influences on investment


  • Rate of economic growth
  • Business expectations and confidence
  • Demand for exports
  • Interest rates
  • Access to credit
  • Government and regulations
• Influences on government expenditure


  • Trade cycle
  • Fiscal policy
• Net trade

  Exports minus imports, value of current account on balance of payments
• Higher real incomes


  Larger trade deficit as more imports
• Depreciation of pound


  Imports more expensive, exports cheaper, trade deficit narrows
• Decline in world economy


  Demand for UK exports falls
• Protectionism


  Guarding domestic industries from foreign competition through tariffs, quotas, regulation or embargoes
• Non-price factors affecting competitiveness


  • Innovation
  • Quality of goods/services
  • Advertising and marketing
  • Customer service
  • Niche markets
  • Lower labour costs
  • Higher productivity
  • Better infrastructure
  • Trade deals and trading blocs