Introduction to Aggregate Demand
As an economic concept, aggregate demand refers to the demand for all finished goods produced in the economy by all the people. It is the total amount spent by the people in exchange for the goods that contribute to the country’s GDP at a specific price level at a specific point of time.
Understanding Aggregate Demand
Aggregate demand directly influences the country's Gross Domestic Product (GDP) in the long run, since they include similar parameters in their individual calculation; and also that, by definition, aggregate demand in the long run forms the GDP. GDP is the amount of finished goods produced over a period of time, while the aggregate demand is the demand for these finished goods. Demand at a microeconomic level only takes into consideration one product, the price and the elasticity of demand of that good, with reference to multiple other factors. Aggregate demand is different since it is a macroeconomic measure and takes into account the demand for all goods. These goods include consumption goods, capital goods like equipment, exports, imports, government spending in programs, etc. Aggregate demand is represented on a graph with a curve that is given by the formula: Aggregate Demand (AD) = C + I + G + Nx Where C is the consumer expenditure, I is the income expenditure, i.e. private investment and corporate spending on equipment, G is government expenditure and Nx is the net exports (exports - imports). The AD curve shows the sum of all individual demand for various types of goods produced in different sectors in the economy.
Highlights of Aggregate Demand
GDP is not equal to aggregate demand in the short run. It is an important deflection since in the short run, the price is nominal and is not adjusted for inflation. Aggregate demand is also not equal to GDP; while GDP does show the strength of the economy, particular to the amount of goods produced, the same cannot be assumed of aggregate demand. Aggregate demand does show the production strength, but it is also based on the assumption that the price level is determined. It is a good measure for an analysis, but does not show actual growth or improvement in standards of living. Aggregate demand is also sometimes known as domestic final demand (DFD), though it is less commonly used.
