Aggregate demand


Aggregate demand is the total of goods and services demanded by a country, at a certain price level, in a certain period of time.

The aggregate demand that can be accounted for, measures exactly the same as GDP. So they are often used synonymously.

How to calculate aggregate demand

To calculate aggregate demand, the same methods can be used as to calculate GDP, however, aggregate demand is associated with expenditure, so it is calculated by the product method, that is, from the point of view of what society has spent. Within this calculation, the expenditure of families (individuals), what has been spent on investment, the expenditure of public administrations, and finally, net exports, which is the difference between imports and exports, are taken into account. exports. In this way, the formula for Aggregate Demand would look like this:

DA = C + I + G + (X-M)

On the other hand, domestic demand is the expenditure on goods and services (public (G) and private (C)) and investment (I) made by the residents of a country during a certain period of time. Therefore the aggregate demand is:

DA = Domestic demand + net exports

This is what each component means:

  • Consumption (C): It is the expenditure that families make on goods and services, including those produced abroad.
  • Investment (I): Represented by the I indicates all the investments that the companies have made: machinery, capital goods, housing ...
  • Public expenditure (G): These are purchases made by any public administration; expenses you make in exchange for goods and services. Within these are not included unemployment expenses, pensions ... because they are transfers that are made in exchange for any good or service.
  • Net exports: It means exports minus imports.
    • Exports (X): are products produced in one country and purchased by residents of others.
    • Imports (M): are goods and services produced in a foreign country and purchased by residents of the country.Their difference is intended to show only the expenditure produced only within the country.

Therefore, it takes into account all the sectors where an expense has been produced. But also, the place where they have been produced is important, therefore, exports and imports are also included. If the number of the former has been higher than that of the latter, it means that we have sold more than we have bought; a positive difference that will be added to the rest of the expense, and vice versa.

Difference between macroeconomics and microeconomics Offer added

The aggregate demand curve

The aggregate demand curve graphically represents all the combinations between the price level and national production with the money market and the goods market. The higher the prices, the lower the aggregate demand. The IS-LM model represents the aggregate demand curve.

IS curve LM curve

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