Definition
Aggregate demand
The total quantity of real output that all buyers in an economy (consumers, businesses, the government, and foreigners) are willing to purchase over a specific time period, at all possible price levels, ceteris paribus.
- Aggregate Demand (AD) is not just the demand of real output from consumers.
- AD consists of the total demand for goods and services in an economy across all the expenditure components:
- Consumer spending (C): all spending made by households on final goods and services during a particular time period.
- Investment (I): investments made:
- By firms on physical capital: money spent on assets used to produce goods and services (factories, machinery, offices...).
- By households and firms on new construction: new housing and other new construction assets.
- Government spending (G): spending made by governments on the economy (roads, hospitals, purchasing of factors of production...).
- Net exports (X-M): the market value of the exports (X) of an economy minus the market value of imports (M) into an economy.
- Exports refer to goods and services produced domestically, and so are included in the calculation of the national output (GDP).
- Imports represent domestic spending on goods and services produced in external economies, and so must be subtracted from expenditures to accurately measure domestic output.
Therefore, the formula for Aggregate Demand (AD):
