2.2 aggregate demand - definitions Flashcards
Aggregate Demand (AD)
The total value of planned expenditure (spending) in an economy over a period of time. Formula: AD=C+I+G+(X-M).
Consumption (C)
Total planned household expenditure on goods and services. All spending by consumers.
Investment (I)
Spending by firms on capital goods, used to increase their future production; or additions to the stock of capital goods.
Government Expenditure (G)
Spending by Government on Goods and Services (The NHS, Education, Defence etc.).
Net Trade
(X-M)
Exports minus Imports. The same as the Balance of Trade.
The Consumption function
The relationship between Real Incomes and Household consumption. As incomes rise, spending rises.
Average Propensity to Consume (APC)
An overall measure of the proportion of income households devote to consumption.
Marginal Propensity to Consume (MPC)
This is a measure of how much (the proportion or percentage) of any increase in household incomes is consumed or spent.
Marginal Propensity of withdrawals
A measure of how much any increase in household incomes is saved, taxed by Government or spent on imports from abroad.
Interest rates
The ‘price’ of money. What you must pay to borrow, or what you earn when you lend money.
Wealth
The value of assets held by a person or a household. This is a stock – whereas income is a flow.
Wealth effects
The effect on a household’s consumption when your wealth rises or falls. When you have more wealth you will spend more.
consumer confidence
A measure of how confident households feel about the economy. Higher consumer confidence usually leads to higher consumption.
Gross Investment
This is the total investment without any adjustment for depreciation.
Depreciation
Over time, capital stock becomes old and machines wear out
Net Investment
Investment adjusted for capital depreciation (minus depreciation)
The accelerator
A change in investment will change the level of Aggregate Demand. But a change in Demand will also change investment.
Business expectations
What firms expect to happen in the economy – when firms think the economy will grow in future they are more likely to invest more
Keynes’ ‘Animal Spirits’
John Maynard Keynes’ theory that business confidence is random and unpredictable.
Public Expenditure
Spending by central and local Government – health, education, transport, police, defence etc.
Government revenue
Money raised to pay for public expenditure through taxation.
Fiscal Policy
Policies that change the level of Government spending, taxation or borrowing in order to manage the level of Aggregate Demand
Budget Surplus
Where Tax revenue exceeds public expenditure
Budget Deficit or PSBR / PSNB
Where Public expenditure exceeds tax revenue – Government borrowing.
Exchange rates
The price of one currency in terms of another. For example, the value at which you can change £s for $s.
International Competitiveness
A measure of how competitive your goods and services are compared to those from other countries .
Non-price factors
Factors aside from the price of a good or service which affect its competitiveness e.g. quality, branding, craftsmanship.
Protectionism
Measures countries use to protect their own firms/workers from competitiveness goods or services made abroad. Most common forms of protectionism are tariff, quotas & regulations.
