Aggregate demand refers to the total demand for all the final goods and services produced in an economy at a given time.
Aggregate demand is a macroeconomic term that describes all the products and services purchased at a certain price level during a specific time.
Aggregate demand is considered to be the same as gross domestic product, as the products that are produced in the country are consumed within the country.
Components of Aggregate Demand
The five components of aggregate demand are as follows:
- Consumer spending: It is the amount of money that consumers spend on finished goods.
- Investment: It includes private investments and spending by businesses on equipment and factories (non-capital goods).
- Government spending: It includes government spending on social services such as improving infrastructure, medical facilities, and more.
- Exports: It refers to the demand for domestic goods from foreign countries.
- Imports: It refers to the demand for goods that are produced in foreign countries.
The mathematical representation of aggregate demand formula is as follows:
AD = C + I + G + (X – M)
It can also be expressed as follows:
Aggregate demand = Consumer spending + Investment + Government spending + (Exports – Imports)
This article was about the aggregate demand formula, which is a very important concept for calculating the demand for products and services in an economy. To read more about such interesting concepts, stay tuned to BYJU’S.