Aggregate Demand

8 Key excerpts on "Aggregate Demand"

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  eBook - ePub

  Macroeconomics For Dummies

  • Dan Richards, Manzur Rashid, Peter Antonioni(Authors)
  • 2016(Publication Date)
  • For Dummies

    (Publisher)

  The AD-AS model is built on simple, sensible intuition. Used carefully, it can be helpful for both explaining and predicting macroeconomic events.

  This chapter explores one half of the AD–AS model: Aggregate Demand (AD). As its name suggests, you can think of AD as representing the combined demand for goods and services of all economic agents — in other words, the combined demand of domestic consumers, firms, and government, plus any net foreign demand. (To read about aggregate supply (AS), flip to Chapter 11 .)

  We describe the various parts that make up Aggregate Demand and examine the AD curve. Along the way you see why AD increases when the price level falls and how the exchange rate affects a country’s net exports. There’s some algebra involved, but don’t worry. We lead you through it and explain everything clearly step-by-step.

  Looking into What Everyone Wants: Aggregate Demand

  Economies run on people, firms, and governments requiring and buying things. A need exists (demand) that firms fulfill (supply). Students of microeconomics spend time learning about the behavior of supply and demand in individual markets (see Microeconomics For Dummies, U.S. Edition by Lynne Pepall (Wiley, 2015). Students of macroeconomics are interested in the economy as a whole, so the emphasis is on aggregate (that is, total) demand for goods and services and aggregate (total) supply.

  More specifically, Aggregate Demand comprises the total demand for goods and services produced in the economy.

  Aggregate Demand is important because (along with aggregate supply) it determines a country’s GDP and price level (and therefore its inflation rate). Changes in Aggregate Demand also impact the level of unemployment.

  Without understanding Aggregate Demand, policy-makers wouldn’t stand much of a chance of being able to control the economy. Indeed the main tools that policy-makers have at their disposal (monetary and fiscal policy) work by influencing Aggregate Demand.

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  Foundations of Macroeconomics

  Its Theory and Policy

  • Frederick S. Brooman(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  CHAPTER 3Aggregate Demand, Output, and Equilibrium      

  1. Aggregate Demand and Supply

  In Chapter 1 , the equilibrium of the economy was roughly described in terms of Aggregate Demand and supply. It was said that when the amount of money everyone wishes to spend is equal to the value of the goods and services currently being made available for purchase, the economy is in equilibrium in the sense that the situation will not itself cause changes in the general level of prices, in the level of output, or in anything else. But the concept of equilibrium implies the possibility of disequilibrium: Aggregate Demand may be equal to aggregate supply, but it may also be larger or smaller at any particular time. In this, there is a marked contrast with the relationship between National Expenditure and National Product, since these are identical in amount at all times and under all circumstances; they can never be said to be in equilibrium, because they can never differ. Nonetheless, the concepts defined in the previous chapter can be used to throw light on the conditions of equilibrium between Aggregate Demand and supply.

  For the time being, the notion of aggregate supply will be likened to that of National Product. This does not mean that the two are to be regarded as identical; National Product is simply a numerical measure of the flow of output, whereas the concept of supply involves the idea of volition – it is the quantity that sellers wish to sell, rather than the amount that they merely happen to have available from current production. Firms will be content to produce a given level of output only if they believe that they could not improve their profits by either increasing or reducing it It will be shown in a later chapter 1

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  A Primer on Macroeconomics, Second Edition, Volume II

  Policies and Perspectives

  • Thomas M. Beveridge(Author)
  • 2018(Publication Date)
  • Business Expert Press

    (Publisher)

  Figure 5.1 .

  We discussed real GDP (y) in Chapter 3 (Volume I), and the aggregate price level (P) in Chapter 4 (Volume I), but let us review. Real GDP is our measure of aggregate output, measured in constant dollars. The aggregate price level is our measure of the overall average price of goods and services, as measured by the Consumer Price Index or the GDP price deflator.

  Composition of Aggregate Demand: From Chapter 3 and the Expenditure Approach to calculating GDP, recall that the demand for goods and services is composed of expenditures by households (consumption, C), businesses (investment, I), government (government purchases, G), and foreigners (net exports, EX – IM). Aggregate Demand, then, is composed of these elements:

  AD = C + I + G + (EX – IM)

  What the AD curve isn’t . Although the AD curve looks very similar to the demand curves we have seen in previous chapters, it is different in significant ways—it’s not just a “big” demand curve.

  Note that, on the vertical axis, “price” is the aggregate price level (P). In the “demand for oranges” diagram, the price of one good (oranges) is on the price axis—here, the aggregate price level is the price of all

  goods and services in the macroeconomy. The distinction is important. In Chapter 2, when we considered the behavior of quantity demanded in a single market such as the market for oranges, we assumed that, if the price of oranges were to rise, then all other factors would be held constant—the

  ceteris paribus assumption. A change in the price of oranges would occur in isolation, without changes in income, wealth, prices of other goods, and so on.

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  The American Economy: A Student Study Guide

  A Student Study Guide

  • Wade L. Thomas, Robert B. Carson(Authors)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  Part 3

  Macroeconomics

  Passage contains an image Chapter 11

  Accounting for Economic Fluctuations: Aggregate Demand and Aggregate Supply Analysis

  KEY TERMS

  Business cycle	Real GDP
  Gross domestic product (GDP)	Aggregate supply
  Aggregate Demand	Real balances effect
  Personal consumption expenditures (C)	Foreign purchases effect
  Potential output (GDP)
  Gross private domestic investment (Ig)	Productivity
  Demand-pull inflation
  Government purchases (G)	Multiplier
  Net exports (X)	Cost-push inflation
  Nominal GDP	Stagflation

  CHAPTER SUMMARY

    1. The principal focus of macroeconomics is three general measures of economic activity: the level of national output, the levels of employment and unemployment, and the price level. While microeconomics directed attention to the workings of individual markets, macroeconomics examines the aggregate performance of the economy.

    2. The principal accounting measure of the aggregate output of the economy and the economy’s overall performance is the gross domestic product (GDP). GDP is the market value of the goods and services produced in a country over a particular period. Other accounts used in measuring macroeconomic performance include gross national product, net national product, national income, personal income, and disposable personal income. Critical to comparing these measures over time is adjusting the dollar values for changes in the price level. By adjusting nominal GDP to a single base period, a measure of real GDP can be obtained to allow consistent comparisons between time periods. Chain-type indexes provide an improved method for adjusting and comparing real GDP figures and growth rates over time.

    3.

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  Chinese Economists on Economic Reform – Collected Works of Lou Jiwei

  • Lou Jiwei, China Development Research Foundation(Authors)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  Equilibrium in aggregate supply and demand, and equilibrium in ‘the use of national income’ and the ‘production of national income,’ are two pairs of economic concepts that are used to analyze short-term economic phenomena. Using them as analytical tools can help us touch upon certain structural issues in our national economy and its prospects for long-term steady growth. They cannot be used to explain these issues in a fully comprehensive way. Nonetheless, equilibrium in our aggregate economy is the basis for any structural evolution and long-term steady growth. One could even say that correcting short-term imbalances in the overall economy is a prerequisite for steady economic growth. Therefore, it is absolutely necessary to have a deep understanding of the full meaning of these two pairs of concepts, as well as how they differ in terms of the policy considerations each one implies.

  Articles on economic topics in our country often equate the ‘Aggregate Demand and aggregate supply equilibrium’ with ‘equilibrium in use of our national income and the production of our national income.’ They refer to an ‘excess of Aggregate Demand over aggregate supply’ as though it were the same as the ‘excess distribution of the national income.’ In fact, these two pairs of concepts are linked but also have certain distinctions. The implications of their corresponding parts are not equivalent. Let’s look at a comparative analysis.

  1. The aggregate supply and the amount of ‘national income production’

  Simply put, ‘aggregate supply’ refers to those products and services that have an ‘actual practical-use value’ that can be produced by existing production capacities within one year. It can be roughly expressed in terms of the expected gross national product (GNP) as measured in constant prices, or by the expected national income. The thing that aggregate supply focuses on is the production capacity of such productive factors as assets, labor, land, imported materials, and foreign capital inflows. Within any given year, these are limited. Each is constrained by the quantity and quality of all other factors. For example, a quantitative maximum is imposed on imported materials and the amount of our foreign debt by the smallest extent of foreign exchange reserves and the highest amount of debt-servicing. ‘Aggregate supply’ refers to the maximum amount of ‘well-being’ that can be produced by the full capacity of production factors, after they are combined in optimal fashion. It is also referred to as the ‘production-possibility frontier’ or the ‘potential production level.’ We should say that referring to the maximum well-being of people is more accurate, since it excludes from the figures production of overstocked things that people don’t need, either for immediate or long-term consumption (as investment).

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  Economics for Investment Decision Makers

  Micro, Macro, and International Economics

  • Christopher D. Piros, Jerald E. Pinto(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  This chapter has introduced important macroeconomic concepts and principles for macroeconomic forecasting and related investment decision making. Macroeconomics examines the economy as a whole by focusing on a country’s aggregate output of final goods and services, total income, aggregate expenditures, and the general price level. The first step in macroeconomic analysis is to measure the size of an economy. Gross domestic product (GDP) enables us to assign a monetary value to an economy’s level of output or aggregate expenditures. The interaction of Aggregate Demand and aggregate supply determines the level of GDP as well as the general price level. The business cycle reflects shifts in Aggregate Demand and short-run aggregate supply. The long-term sustainable growth rate of the economy depends on growth in the supply and quality of inputs (labor, capital, and natural resources) and advances in technology. From an investment perspective, macroeconomic analysis and forecasting are important because business profits, asset valuations, interest rates, and inflation rates depend on the business cycle in the short to intermediate term and on the drivers of sustainable economic growth in the long term. In addition, it is important to understand fiscal and monetary policies’ economic impact on and implications for inflation, household consumption and saving, capital investment, and exports.

  • GDP is the market value of all final goods and services produced within a country in a given time period.
  • GDP can be valued by looking at either the total amount spent on goods and services produced in the economy or the income generated in producing those goods and services.
  • GDP counts only final purchases of newly produced goods and services during the current time period. Transfer payments and capital gains are excluded from GDP.
  • With the exception of owner-occupied housing and government services, which are estimated at imputed values, GDP includes only goods and services that are valued by being sold in the market.
  • Intermediate goods are excluded from GDP in order to avoid double counting.
  • GDP can be measured either from the value of final output or by summing the value added at each stage of the production and distribution process. The sum of the value added by each stage is equal to the final selling price of the good.
  • Nominal GDP is the value of production using the prices of the current year. Real GDP measures production using the constant prices of a base year. The GDP deflator equals the ratio of nominal GDP to real GDP.

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  Social and Structural Change

  Consequences for Business Cycle Surveys - Selected Papers Presented at the 23rd Ciret Conference, Helsinki

  • Karl Heinrich Oppenländer, Günter Poser(Authors)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  A Treatise on Money, voI.II, The Royal Economic Society, 1971, p. 87).

  1 Introduction

  The 1990’s have witnessed a revival in economist’s interest and hope of explaining aggregate and microeconomic demand behaviour. On the one hand, much attention has been devoted to aggregate investment, viewed as providing hope for future prosperity.1 On the other hand, much has been written about precautionary saving, linking consumption to future income prospects.2

  In spite of the abundance of theoretical work, so far there have been few empirical studies focusing on Aggregate Demand in explaining business cycles and growth performances, especially at EU level.3 Much attention has been devoted in recent years to EMU problems and less care has been taken of the effects of restrictive policy measures on economic climate and demand.

  This paper aims to give a modest contribution in this direction, tracking EU domestic demand from 1985 mainly using simple and composite indicators stemming from the EU-harmonized qualitative surveys results.

  Harmonized surveys do present many advantages as sources of economic information, because they allow to study aggregate behaviour on the basis of microfounded data (at firm and household levels) plus they provide a rapid mean of compiling simple statistics, with the results available before those obtained with traditional statistical methods. Moreover, business surveys provide information in areas not covered by quantitative statistics (e.g., about capacity utilization and stocks of finished goods) and therefore may be considered as complementary to official statistical sources.

  The layout of the paper is as follows. Section 2 highlights the main characteristics of the European economy since 1985. Indeed, various events and shocks have shaped the Community economy during the period under consideration: the launching of the Single Market Programme in 1985, the adhesion of Spain and Portugal in 1986, German reunification in 1990, structural factors such as technological change and globalization, and cyclical factors including exchange rate crises.1

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  How Real is the Federal Deficit?

  • Robert Eisner(Author)
  • 2010(Publication Date)
  • Free Press

    (Publisher)

  To answer this, we must build upon a body of theory and analysis well known to most economists, and indeed to a generation or two of survivors of freshman economics courses. We also have to be familiar with some of the recent reservations and objections to this theory and analysis. If we are convinced beforehand that the reservations and objections have been sufficient to negate the analysis, we have in effect decided that deficits do not matter. Those so convinced have perhaps read too far already, and might well pursue a more promising pastime. Those still concerned may want to plunge on with us into the theory.

  Deficits, Debt, and Aggregate Demand

  The first thing to understand then is that when the government buys goods and services it contributes to Aggregate Demand. Whether the expenditures are worthwhile, useless, or counterproductive is beside the point. Government purchases constitute demand. To any business, sales of goods to the government are just as lucrative as sales to a private purchaser (and given the notorious government buying habits, frequently more lucrative).

  The first objection to this argument is that government demand must replace private demand. One can indeed imagine certain scenarios in which this would occur. For example, government expenditure to build roads may reduce private demand for railroad cars. But this very example also suggests the frailty of the argument. Government road construction may stimulate private demand for automobiles, buses, and trucks and gasoline, filling stations and motels. While government expenditures may prove a substitute for private expenditures, they may just as well stimulate additional private expenditures.

  Government expenditures which do not entail the purchase of goods and services contribute to demand indirectly. Such expenditures include interest payments on the debt and the general category of transfer payments—social security and unemployment benefits, payments to veterans of the armed forces, and government employee retirement benefits. The more individuals receive in the way of these payments, the bigger is their personal income and the greater their consumption demand—spending for food and clothing, television sets, travel, and cars.

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