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Aggregate demand

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All countries worldwide need to acquire a series of different goods and services as these are required by their inhabitants. In this case, the aggregate demand comes from the State , from the companies that make up a country and from all the different economic agents that the families that make up a given place have. It is a term that is closely linked to GDP or gross domestic product , since both generally measure the same.

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What is aggregate demand?

Aggregate demand is a type of measure of an economic nature that includes the sum of all the goods and services that are produced by the economy of a country and that represents the total production of a service.

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  • Definition
  • Aggregate demand characteristics
  • Components of aggregate demand
  • Formula
  • Displacement
  • How it differs from the aggregate offer
  • Importance
  • Examples of aggregate demand

Definition

Aggregate demand is a variable that is closely related to the economic activity carried out in a given country. It is a term that refers to and represents the total expenditure that the different economic agents are willing to carry out within a country within a given period of time. It is then the total value of the expenses that are made in goods and services by consumers , companies and the State .

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It is important to mention that within the term we also find the aggregate global demand which refers to the total amount of goods and services that have been raised by the different families that make up a country, by the companies that are developed in it. , by the government and by foreigners .

Characteristics of  aggregate demand

Some of the most notable characteristics of aggregate demand are the following:

  • It can be accounted for in a very specific way.
  • It takes into account the expenses of the consumers and this will always depend on the economic situation.
  • It is determined by the public spending that a country has.
  • It takes into account the investment that is made by SMEs and by all private companies .
  • It has a type of curve that shows the different combinations between prices and production.

Components of aggregate demand

Aggregate demand is made up of the consumption of a place, the investment made by this place to acquire the different goods and services they need, public spending and finally the exports that occur in a country. In this way, we can say that the components of aggregate demand are the following:

  • Consumption : refers to the expenses that people make in order to maintain a life considered comfortable . Here we find aspects such as food, clothing, hygiene products among others.
  • Investment : this component focuses mainly on the cost that companies make to be able to maintain themselves without losses. Here we find elements related to equipment , infrastructure for the development of the company and the services necessary to keep the company running.
  • Public expenses : these are the funds used by the government to improve the services used by society in a totally global way. In order to meet public expenditures, public revenues are used, such as taxes , service payments and rents .
  • Net exports : are all the sales of products or services that are made in a country to the different consumers that are located in other countries. This point will always depend on the value of the currency , the demand for goods and services and the interest on the part of the foreigner in a certain product.

Formula

In order to calculate aggregate demand, similar methods are used to those used to calculate GDP, however, this type of demand is more related to spending, so the product method is used to perform its calculation , in other words , the point of view that is related to what is spent in society . The formula used to make this calculation is the following:

DA: C + I + G + (XM)

Where:

  • C : refers to consumption , to the expenditure made by families to acquire goods and services.
  • I : is the investment made by different companies.
  • G : is the public expenditure that implies all kinds of purchases made for the public administration, goods and services.
  • X : refers to the exports that a country makes to be bought by other countries.
  • M : are all the goods and services that are produced abroad and that are acquired by the inhabitants of a certain place.

Displacement

It is important to know that the curve of aggregate demand also has a negative slope – related prices and this tells us that if remain constant factors of economy , when the level of prices falls, the increases amount of goods and services that are in demand. The reasons why the aggregate demand curve may suffer from a shift are the following:

  • The monetary policy that arises as a result of the money supply.
  • Interest rates .
  • The fiscal policies that increase or reduce public spending and taxes.
  • Changes that occur in exports and imports .
  • Expectations regarding the future of income levels and inflation .

How it differs from the aggregate offer

The aggregate demand is the one that represents the total expenditure that can be made by the different national or foreign economic agents within a country, while the aggregate supply is in charge of describing the production that can be sold by the companies depending on the level of prices , costs in production and the different expectations of companies.

Importance

Aggregate demand is important because it is responsible for reflecting the agents that are part of an economy , it is the means by which you can get to know the amount of goods and services that exist within a country and the amount of products that consumers want and need to buy and consume. It is the one that finally reflects all the total spending that occurs in the economy of a country, which is generally known as the gross domestic product .

Examples of aggregate demand

Taking into account that aggregate demand is the way to observe how a country’s economy develops , we can mention the following examples:

  • In Mexico , aggregate demand shows a great deceleration with respect to the country’s growth and there have been decreases in consumption, in different investments and in public expenditures, this due to the mismanagement of resources by the government.
  • Venezuela is currently experiencing one of the most powerful crises in terms of the economy. Its aggregate demand grows day by day due to the lack of investment by companies, the lack of development of products and services and the lack of consumption by the public sector.

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