4) Components of Aggregate Demand - MMT Flashcards
how many components of AD are there?
5
what are the 5 components of AD?
1) Consumption (C)
2) Investment (I)
3) Government Expenditure (G)
4) Exports (X)
5) Imports (M)
when is C (consumption) almost always the biggest component of AD?
in a developed economy
what is consumption (C)?
it refers to the total spending on goods and services by households, in order words, C= consumer spending
what is consumer spending?
- the total amount of how much private individuals spend in shops, restaurants, hairdressers, cinemas etc
what percentage is C of the UK’s AD?
60-65%
what does C (for aggregate demand) stand for?
consumption
what does I (for aggregate demand) stand for?
Investment
what does G (for aggregate demand) stand for?
Government Expenditure
what does X (for aggregate demand) stand for?
Exports
what does M (for aggregate demand) stand for?
Imports
investment is a… part of AD
critical
what is investment?
it refers to any addition to Capital Stock of the economy - eg factories, machines, or any item that is used to produce other goods and services
normally when we talk about I what do we mean?
spending by private sector businesses
I is the most… of all the components
volatile (changeable)
why can I be volatile?
often, it collapses in a recession and goes accelerates when the economy is strong
what percentage of the UK’s AD is I?
15-20%
what percentage of the UK’s AD is G?
20-25%
put simply G=…
Government spending
more precisely G=…
it is all government spending on goods and services needed by the country and spending on things that may benefit the country in the future
eg in state schools what does G include?
includes the purchase of exercise books,teachers and potential building of blocks in school
what does G not include?
it doesn’t include paying benefits like pensions; benefits are a transfer payment and don’t add new value to AD
the UK has a relatively… government sector, responsible for between 20-25% of AD
big
what are imports?
are goods and services that are produced in other countries but demanded by economic agents in this country
why are imports negative?
they do not add value to our AD, they are a drain on our AD-demand is leaking out of this country’s economy to another
in the AD equation we always treat… together (separate from the other components)
X and M together
why does X-M usually give a negative value?
In the UK M is usually higher than X meaning X-M gives a negative value
what is the AD equation?
AD= C+I+G+(X-M)
C is the… part of the AD equation
core (we assume that C is pretty stable)
I+G+X are called…
injections
what are injections?
components that’s ed value to AD
M is a…
leakage
what 3 leakages are there?
M (imports), Savings (S) and Taxation (T)
what are leakages?
components that take value away from AD
what is the equation when the economy is in equilibrium?
injections (I+G+X) = leakages (S+T+M)
when should the economy expand?
if injections exceed leakages
when would the economy shrink?
if leakages exceed injections
