Aggregate demand

In economics, aggregate demand is the total demand for goods and services in the economy (Y) during a specific time period. It is often called effective demand. Put another way, it is the demand for the gross domestic product of a country (the total new production sold through the market). This demand consists of four major parts, which can be stated in either nominal or "real" terms:

Related Topics:
Economics - Effective demand - Gross domestic product - Nominal or "real"

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• personal consumption expenditures (C) or "consumption," demand by households and unattached individuals; its determination is described by the consumption function.
• gross private domestic investment (I), demand by business firms and some individuals, for new factories, machinery, computer software, housing, other structures, and inventories.
• gross government investment and consumption expenditures (G).
• net exports (NX), i.e., net demand by the rest of the world for the country's output.

In Keynesian economics, not all of gross private domestic investment counts as part of aggregate demand. Much or most of the investment in inventories can be due to a short-fall in demand (unplanned inventory accumulation or "general over-production"). (Inventory accumulation would correspond to an excess supply of products; in the National Income and Product Accounts, it is treated as a purchase by its producer.) Thus, only the planned or intended or desired part of investment (Ip) is counted as part of aggregate demand.

Related Topics:
Keynesian - National Income and Product Accounts

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In sum, for a single country at a given time, aggregate demand (D or AD) = C + Ip + G + NX.

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Strictly speaking, it is questionable whether this aggregation is possible, as it is impossible to form such macrovariables from some microvariables: how do you add up litres of gasoline and toothbrushes? In the sense of nominal monetary values (prices) this is possible; but in the sense of real goods it is not. Therefore it might be argued that an "aggregate demand curve" does not even exist in an (income,spending)-space.

Related Topics:
Macrovariables - Microvariables

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Aggregate demand: Two Concepts of the "Aggregate Demand Curve" ►