Aggregate Demand and its Components

In the chapter 2 of Macroeconomics, National Income Accounting, we had learnt a few terms in an economy (Gross Domestic Product – GDP) like :

  • Consumption
  • Investment or the total output of final commodities and services

These terms have dual associations. In Chapter 2 these terms were used in the accounting sense indicating actual values of these items as measured by the pursuits within the economy in a certain year. We term these actual or accounting values done afterwards the measures of these items.

These terminologies, however, can be used with a different association. Consumption may indicate not what people have actually utilised in an year, but what they had planned to utilise during the same period. Similarly, investment mean the amount a manufacturer plans to add to his or her catalogue (inventory). It may be distinct from what he or she ends up doing. Suppose the manufacturer plans to add 1,000 worth commodities to her stockpile by the end of the year. Her planned investment is, hence, 1,000 in that year. However, due to an unpredicted increase of demand for the commodities in the market the volume of the sales shoots up what they had outlined to sell and to meet this extra surplus demand, she has to sell commodities worth 300 from her stockpile. Hence, at the end of the year, their catalogue increases by (1,000 – 300) = 700 only. Their outlined investment is 1,000 whereas the actual or ex post, investment would be 700 only. We call the outlined values of the variables – utilisation, investment or output of final commodities – their ex post measures.

In simple words, ex ante portrays what has been outlined , and ex post portrays what has actually happened. In order to comprehend the determination of earning, we need to know the outlined values of distinct components of the average demand.

The above mentioned is the concept that is explained in detail about Aggregate Demand and its Components. To know more, stay tuned to BYJUS.