Aggregate Demand

Aggregate Demand:

The net expenditure of an economy can be sub-divided into four groups of spending. They are:

a) Consumption expenditure (C),

b) Investment expenditure (I),

c) Government expenditure (G) and

d) Net expenditure on trade or net exports that is, exports minus imports, (X-M).
The aggregate demand is the total sum of all such spending. Therefore the aggregate demand function is symbolized as,

AD = C+ I + G + (X-M) …                   (1)

This function exhibits that the aggregate demand is equivalent to the sum of expenditure correspondingly on consumption (C), Investment (I) Government spending (G) and net exports (X-M). Therefore aggregate demand is the net value of all planned expenses of all buyers in the economy. This is the net demand for services and goods in the economy (Y) in a particular time period. Furthermore, the aggregate demand is termed as the amount of commodities people want to purchase.

In the economy, as one man’s expenses is the other man’s income. The net expenditure of the economy should be equivalent to the total income. That is,

Total income(Y) = Total expenditure (AD)

As Y = AD,
equation (1) can be written as:
Y = AD = C+ I + G + (X-M)

or Y = C+ I + G + (X-M)  …                   (2)

Keynes provides all attention to the ADF. This feature was neglected by economists for over 100 years. Supposing that ASF is constant, the major basis of Keynesian theory is that employment based on aggregate demand that itself based on two factors:

1.  Propensity to consume (Consumption function)
2.  Inducement to invest (Investment function).

 

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