DETERMINATION OF INCOME AND EMPLOYMENT
AGGREGATE DEMAND AND ITS COMPONENTS
In economics, the concept of aggregate demand refers to the total quantity of goods and services demanded across all levels of an economy at a given price level and in a given period of time. Aggregate demand is usually represented as the sum of four major components: Consumption (C), Investment (I), Government Spending (G), and Net Exports (X – M), where Net Exports is Exports (X) minus Imports (M). The formula can be written as:
Components Of Aggregate Demand
1.Consumption (C): This is the total value of all goods and services consumed by households. Consumption is the largest component of aggregate demand. Factors that influence consumption include disposable income, interest rates, consumer confidence, etc.
2.Investment (I): Investment is the spending on capital goods that will be used for future production. This includes business investments in equipment and structures, residential construction, and changes in business inventories. Interest rates, business confidence, and future expectations are some of the determinants of investment.
3.Government Spending (G): This includes all government consumption, investment, and transfer payments. It is a component that can be changed relatively quickly through fiscal policy. Factors that influence government spending include political considerations, economic conditions, and policy objectives.
4.Net Exports (X – M): This is the value of a country’s exports minus its imports. If a country exports more than it imports, it has a trade surplus; if it imports more than it exports, it has a trade deficit. Exchange rates, global economic conditions, and trade policies are some of the determinants of net exports.