To calculate Aggregate Demand, the formula AD = C + I + G + (X-M), where: * C is consumer’s expenditure on goods and services * I is capital Investment * G is government expenditure * X is exports of goods and services * M is imports of goods and services
(X-M) shows the net exports. When net exports are positive, there is a trade surplus (adding to AD); when net exports are negative, there is atrade deficit (reducing AD). The UK economy has been running a large trade deficit for several years now as has the United States.
Aggregate Demand Curves
Shifts in AD curves
A change in factors affecting any one or more components of aggregate demand, households (C), firms (I), the government (G) or overseas consumers and business (X) changes planned aggregate demand and results in a shift in the AD curve.
The diagram below shows a shift to the left of AD from AD1 to AD3, and a shift to the right of AD from AD1 to AD2. The increase in AD might have been caused for example by a fall in interest rates or an increase in consumers’ wealth because of rising house prices.
Factors causing a shift in AD * Changes in Expectations
Current spending is affected by anticipated future income, profit, and inflation.
The expectations of consumers and businesses can have an effect on planned spending in the economy. E.g. expected increases in consumer incomes, wealth or company profits encourage households and firms to spend more - causing AD to increase. Similarly, higher than expected inflation makes people spend more now before price increases come into effect - a short term increase in AD. When confidence turns lower, it is expected that an increase in saving and some companies