Meaning: -It is the total demand for
goods and services in the economy during a given period of time, and at a given
price level. It measures total spending by all the different sections in the
economy. i.e. consumers, business units, and government.
Aggregate Demand Consists of
the following Components:
C stands for Consumption Demand
I Stands
for Investment Demand
G stands for Government Demand
(X-M) stands for Foreign Demand
Symbolically, Aggregate Demand can
be expressed as Aggregate Demand = C+I+G+ (X-M)
The main components of
Aggregate demand are explained as follows:
1.
Consumption Demand: -Consumption
demand is a part of Aggregate demand. It refers to the Consumption
Expenditure incurred by consumers in the economy. It is the total demand for
goods and services in a given period of time.
The Consumption Expenditure may be
(a)
Autonomous
Consumption Expenditure, which is incurred even when the income is zero. It is incurred
irrespective of the size of income. For instance, expenditure on the basis of
borrowings.
(b)
Induced Consumption
Expenditure,
which is incurred depending on the level of income.
The main determinants of
consumption demand are as follows: -
·
Level of house hold
income
·
Disposable income
·
Stock of wealth
·
Credit facility etc..
2.
Investment Demand: -It is also referred as ‘investment expenditure’. It is incurred by private firms on capital good
such as buildings, machines, etc. such expenditure leads to capital formation
in the country. The investment expenditure can be of several types (a) Gross
and Net Investment (b) Autonomous and Induced Investment (c) Financial and Real
Investment.
The main determinants of Investment demand are as follows:
·
Level of Savings
·
Change in Demand
·
Change in price Level
·
Government policies etc..
3.
Government Demand: - Many
countries in the world have accepted the concept of welfare state. S a result,
there has been rapid increase in government expenditure, which constitutes an
important part aggregate demand. It may be of two types (a) Consumption
Expenditure by the Government (b) Investment Expenditure by the Government
4.
Foreign Demand: -(X-M) Foreign demand is a
part of aggregate demand. Demand for a home country’s goods and services
from foreign countries are known foreign demand. It is usually measured as the
difference between exports(X) and imports (M) i.e (X-M). The foreign
demand can be positive when exports are more than imports. It can be negative
when exports are less than imports.
The main determinants of Foreign
demand are as follows:
·
Import and Export policy of the trading
country.
·
Foreign exchange rate
Prices of goods and services in different
countries. Etc.
