Aggregate Demand.

Aggregate demand is the demand for all goods and services produced in the NZ economy in one year.

It is all the spending on all goods and services by

- New Zealand Consumers.

- New Zealand Firms.

- The Government in New Zealand.

- New Zealand produced products that are brought by overseas buyers - Exports.

- We take away the impact of overseas products brought by New Zealand - Imports.

So Aggregate Demand is equal to...

Consumption = C

Investment = I

Government Spending = G

Export Receipts = X

Import payments = M (Taken away).

So AD = C + I + G = (X - M)

So Aggregate demand is the spending on (demand for) all goods and services produced in New Zealand in one year.

The Demand for all goods and services is also equal to the total output for all goods and services.

So Aggregate Demand is also equal to GDP.

GDP is the total market value of all goods and services produced in a country in a year.

So Aggregate demand is the demand for the gross domestic product (GDP) of a country, and is represented by this formula:

Aggregate Demand (AD) = C + I + G + (X-M) C = Consumers' expenditures on goods and services.
I = Investment spending by companies on capital goods. G = Government expenditures on publicly provided goods and services. X = Exports of goods and services. M = Imports of goods and services.

So what affects Aggregate Demand?

Anything that affects the overall demand for goods and services will affect the aggregate demand for goods and services.

Things like -
- A change in household disposable income which affects household spending.
- A change in interest rates which will affect both household and business borrowing.
- A change in government spending.
- A change in demand for New Zealand products by overseas firms.
- A change in the New Zealand exchange rate. An appreciation or depreciation of the new Zealand dollar.
Which will affect both exports and imports.- A change in migration rates.

The Aggragate Demand Curve.

The diagram slopes downward as this shows that as the general price level increases people tend to buy less goods and services.

The vertical axis shows the general price level in the economy.
Remember Aggregate Demand is the demand for ALL goods and services and so it is only a change in the general or average price level that affects Aggregate Demand.
The vertical axis shows the average price level in the economy or changes to the average price level - which is the rate of inflation.

The horizontal axis shows the total output of all goods and services in the economy, which is equal to INCOME in the economy and therefore total employment.

Click on the different impacts on AD in the diagram to see the effect.

The impact of an increase in..

Consumption - caused by things like

- An increase in household incomes,
- an increase in immigration,
- an decrease in income taxes.
- an increase in consumer confidence.
- a decrease in interest rates / increase in consumer borrowing.
- an increase in transfer payments.

Investment - caused by things like

- A decrease in interest rates - so firms borrow more.
- An increase in business confidence.
- An increase in demand for goods and services which increases profits and production.

Example: How would an increase in consumption affect Aggregate Demand?

An increase in consumer spending (consumption) by households would increase AD.
Consumption is a component of Aggregate Demand and so an increase in consumption would cause AD to increase to AD2 leading to an increase in output / income for the conomy form Y to Y2.

Government Spending - caused by things like.

- An increase in Government revenue.
- A change in Government policy.
- Expansionary fiscal policy (where the Government increases spending to try and grow the economy).

Exports - caused by things like
- an increase in overseas demand for New Zealand products.
- a decrease in the exchange rate (depreciation) making New Zealand's products cheaper for overseas buyers.