Aggregate Demand Flashcards
Define Aggregate Demand
Total spending on goods and services in the economy.
What is the formula for AD?
AD = C + I + G + (X-M)
Give examples of consumer spending.
Durable goods, e.g. washing machine, cars, TVs etc.
Non-durable goods, e.g. food and drinks.
Investment Spending.
Spending by businesses and the government on capital goods such as plant and equipment, technology and new buildings to produce consumer goods in the future.
How much of UK GDP does consumer spending make up?
Consumer spending accounts for over 65% of AD in the UK.
Investment accounts for between 15-20% of UK GDP in any given year but how much of that is by private businesses such as BP & Tesco?
Adds up to 75% of the investment in the UK.
What is government spending?
Spending on state-provided goods and services including public goods and merit goods.
How much of UK GDP does government spending account for?
It accounts for 18-20% of UK GDP.
Define Public Goods & Merit Goods
Public goods = a good that is both non-excludable and non-rivalrous, in that individuals cannot be excluded from use or could benefit from without paying for it, and where use by one individual does not reduce availability to others or the good can be used simultaneously by more than one person.
Merit Goods = goods that people underestimate the benefits. They have positive externalities.
Net Exports.
The value of exports minus the value of imports.
X > M
Trade Surplus and an increase in aggregate demand.
X < M
Trade Deficit and a decrease in aggregate demand.
What factors cause shifts in aggregate demand?
Changes in consumer confidence. Changes in monetary policy. Changes in fiscal policy . Economic events in the international economy. Changes in household wealth. Changes in the supply of credit.
