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DefinitionIn macroeconomics, aggregate demand (AD) is the total demand for final goods and services in an economy at a given time. This is the demand for the gross domestic product of a country.
The aggregate demand curve
The aggregate demand curve is plotted with real output on the horizontal axis and the price level on the vertical axis.
FIND THE CORRECT
DEFINITION…
…for each of the following words.
1. Goods A. The monetary value of all the finished goods and services produced within a country's borders in a specific time period. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
2. Services
B. is the total demand for final goods and services in an economy at a given time.
3. Gross domestic product
c. are something that you can use or consume. …are owned by the purchaser and can be used once or repeatedly.
4. Aggregate demand
D. …. are actions or an action that someone does for you. …. are intangible property since you don’t receive anything solid and you don’t obtain ownership of the actions taken.…
Demand sourcesAn aggregate demand curve is the sum of individual demand curves for different sectors of the economy. The aggregate demand is usually described as a linear sum of four separable demand sources:AD= C + I + G + NX(NX=X-M)
These four major parts are:C is consumption (may also be known as consumer spending)
I is Investment;G is Government spending;X is total exports;M is total imports;NX is total exports minus total imports;
BRAINSTORMING…
…warm up questions...
What is consumption? What is investment?What is Government spending?What is net export?
Associate the concepts to the pictures
SOME QUESTIONS…
Which demand-sources are these?
Expenditures Sources: consumption, investment, or governments spending?
1) Spending on candy bars;2) Spending on national health
service;
3) Spending on fixed capital;
4) Spending on cinema tickets.
Whose are these expenditures?…Expenditures
Subjects: firms, households, governments.
1) Expenditure on food to feed their self;
2) Spending on employment services;
3) Spending on factory construction;
4) Spending on welfare benefits.
Consumption expenditures (C)C is expenditure on goods and services for final personal use, mostly incurred by households; its determination is described by the consumption function.
Consumption expenditures (C): the consumption function.
The consumption function is C= C +c Yd ;
Where C is autonomous consumption, c is the marginal propensity to consume, Yd is the disposable income(Y-T) .
Consumption expenditures (C): the autonomous consumption.
The autonomous consumption (C) is considered autonomous of income only when expenditure on these consumables does not vary with changes in income. Such consumption is expenditure that occurs when income levels are zero.
Consumption expenditures (C): the autonomous consumption
For example it may be required to fund necessities and debt obligations.
Consumption expenditures (C): the marginal propensity to consume
The marginal propensity to consume (c), is the proportion of disposable income which individuals spend on consumption…
Consumption expenditures (C): the marginal propensity to consume
For example, if a household earns one extra dollar of disposable income, and the marginal propensity to consume is 0.65, then of that dollar the household will spend 65 cents and save 35 cents.
Consumption expenditures (C): the disposable income Yd
Disposable income is total personal income minus personal current taxes.Restated, consumption expenditure plus savings equals disposable income.
PEER TO PEER…
Answer the questions on your own, then check with your partner.
1. Which is the autonomous consumption value in this economy?
2. Which is consumption when disposable income is 800?
3. Which is the consumption value if total income is 1400£ and total spending on current taxes is 200?
Investment (I): definitionIt’s gross private domestic investment (I), such as spending by business firms on factory construction. This includes all private sector spending aimed at the production of some future consumable.
Investment (I): investment functionInvestment is affected by the output (Y) and the interest rate (i). Consequently, we can write it as
I(Y,i)Investment has positive relationship with the output and negative relationship with the interest rate.
TICK THE CORRECT
ANSWER.…
1. Investment
machinery, land, Food purchase of washing
machinepurchase of a new
pair of shoes pieces of factory
machinery2. Consumption
service of getting your house cleaned
hamburger at the fast food restaurant
purchase of production inputs
purchase of shelves for office
infrastructure purchase of
Investment (I): investment function
Investment has positive relationship with the output.When GDP increases, the output and the capacity utilization increases. This results in an increase of capital investment.
Investment (I): investment functionInvestment has negative relationship with the interest rate. An interest rate is the rate at which interest is paid by borrowers (debtors) for the use of money that they borrow from lenders (creditors). This implies higher investment spending with a lower interest rate.
Investment (I): investment functionFor example, an increase in the interest rate will cause aggregate demand to decline. Interest costs are part of the cost of borrowing and as they rise, both firms and households will cut back on spending. This shifts the aggregate demand curve to the left.
1. What happens to aggregate demand if …a. Rate interest increases?
b. Marginal propensity to consume decreases?c. Disposable income increases?
d. Taxes decrease?
Government spending
Government spending includes all government consumption and investment.
Government spendingIn national income accounting, the acquisition by governments of goods and services for current use to directly satisfy the individual or collective needs of the community, is classed as government final consumption expenditure.
Government spendingGovernment acquisition of goods and services intended to create future benefits, such as infrastructure investment or research spending, is classed as government investment (government gross capital formation).
Government spending
These two types of government spending, on final consumption and on gross capital formation, together constitute one of the major components of gross domestic product.
FIND THE CORRECT
DEFINITION…
…for each of the following words.
1. Curve
slope2. Curve shift
3. Governmentinfrastructure investment 4 Rate interest
