What is Aggregate Demand and its Components?

What is Demand?

It is customer's desire to purchase a product

It is related to a particular good or service so it is a concept of microeconomics

What is Aggregate Demand?

It means total demand of final goods and services of all sectors of an economy at a given level of income

Note

It includes total planned expenditure of all sectors of expenditure

It is a concept of macroeconomics

We can say

Aggregate Demand is

Total Value of All goods and Services

which all sectors of economy

are planning to buy

at given level of income

during one accounting year

Important Points About Aggregate Demand

It measures Total expenditure of all Sectors of economy like

Households, firms, Govt and Rest of World

It considers Planned Expenditure and not Actual Expenditure

It is measured for period of accounting year (From 1 April to 31 March), so it is a flow concept

It is measured at given level of income (it is because expenditure varies with level of income)

Which expenditure are taken while calculating Aggregate Demand?

or

What are the components of Aggregate Demand?

It covers 4 types of Expenditure

Private Household Consumption Expenditure ( C )

Investment Expenditure (I)

Government Expenditure (G)

Net Exports (X-M)

Lets learn about it in detail

Private Final Consumption Expenditure

It includes expenditure of households and individuals on different expenses like food, clothing, car etc

It depends upon disposable income of individual (Income -Tax)

Investment Expenditure

Investment in Capital goods like Plant and Machinery, Building during a financial year

In this chapter, we take it as autonomous or fixed

Government Expenditure

All expenses made by Govt during a financial year

This may be consumption expenditure or Investment expenditure

Net Exports

Net Exports are Exports - Imports

Exports are Sale of Goods and service outside domestic territory

Import are Purchase of goods and service from outside territory

We reduce Import from Export to get Net Exports

Hence,

Aggregate Demand = private Consumption Exp + Investment Expenditure + Govt Spending Expenditure + Total Exports -Total Imports

AD = C + I + G + X - M

However, as per NCERT Syllabus

Aggregate Demand = Consumption Exp + Investment Expenditure

AD = C+I

What is formula for Aggregate Demand as per NCERT Syllabus?

For the purpose of this chapter, we consider only 2 sectors - Households and Firms

So we consider only 2 expenditures

Aggregate Demand = Private Consumption Exp + Investment Expenditure

AD = C+I

This is because in Macroeconomics, We follow 2 Sector Model of Economy

Lets learn about Consumption Expenditure and Investment Expenditure in Detail

NCERT Questions

No questions in this part

Other Books

Question 1

Define Aggregate Demand?

State its components.