Aggregate Demand (AD)
Aggregate Demand (AD) refers to the total value of final goods and services that all the sectors of an economy are planning to buy at a given level of income during a period of one accounting year.
In the other words, Aggregate Demand (AD) is the Aggregate expenditure that different sectors of the economy are willing to incur during a given period. AD and Aggregate expenditure mean the same. AD is the total expenditure that all households, firms, governments, and the rest of the world are planning to incur during a given period of time.
Key Points of Aggregate Demand (AD)
* Total value of final goods and services.
* All the sectors of an economy are planning to buy.
* Given level of income.
* During a period of one accounting year.
Components of Aggregate demand
The various components of Aggregate Demand are:
1. Private (Household) Consumption Expenditure (C) = Total plan expenditure incurred by households on the purchase of goods and services. It’s depending on disposable income. Higher the D.I. higher the C and vice-versa.
2. Investment Expenditure (I) = Total expenditure incurred by all private firms on capital goods. Addition to the stock of physical capital assets, such as Plant and machinery, equipment, buildings, etc, and change in inventory.
3. Government Expenditure (G) = Government Expenditure refers to the total expenditure incurred by the government on consumer goods and capital goods to satisfy the common needs of the economy.
4. Net Exports (X-M) = It refers to the difference between exports and imports.
C= Private (Household) Consumption Expenditure
Diagrams for Circular flow of Income
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