Macro 1.2 Aggregate Demand Flashcards
Aggregate demand
The ability and willingness of all economic agents to spend in the economy.
Consumption (C)
Spending by households on goods and services
Investment (I)
Spending by firms on goods and services to be used in the production of other goods and services.
Government expenditure (G)
Spending by the government on good and services
Net exports (X-M)
the value of exports minus the value of imports
Exports (X)
Goods and services that firms sell overseas
Imports (M)
Goods and services that households and firms buy from overseas.
AD=C+I+G+(X-M)
Aggregate demand= Consumption+ Investment+ Government expenditure+(exports-imports)
GDP
Gross domestic product (measurement of output)
GDP
Total value of all the goods and services produced within the UK economy
GDP and price
Inverse relationship- higher GDP, lower price level.
Factors affecting consumption
Income, taxes, price level, social security payments, interest rates, expectations, wealth, availability of credit.
Consumables
Goods which consumers consume e.g. food, drink
Consumer durables
Goods which consumers buy which last for a longer period of time e.g. washing machine
Permanent income levels
Where household consumption decisions are based on expected income levels over the next 5 or 10 years (Friedman)
Lifetime income decisions
Where consumer decisions are based on household expected income over a life time. (Modigliani)
Marginal Propensity to Consume
The proportion of an income that a household chooses to spend
Consumption function
the relationship between consumer expenditure and disposable income.
What affects disposable income?
wealth, interest rate, taxes, social security payments, inflation
