AGGREGATE DEMAND Aahana, Aarjav, Anika, Devraj, Rishika
CONSUMPTION EXPENDITURE (C)
NET EXPORT EXPENDITURE (X-M)
What is consumption expenditure?
- Refers to all of an individual's and household's spending on goods and services in the economy is the biggest component of an economy's aggregate demand
Examples
- Durable goods: motor vehicles and parts, furnishings and durable household equipment, recreational goods and vehicles
- Nondurable goods: food and beverages purchased for off-premises consumption, clothing and footwear, gasoline and other energy goods
- Services: housing and utilities, healthcare, transportation services, recreation services, food services and accommodations, financial services and insurance
INVESTMENT (I)
GOVERNMENT EXPENDITURE (G)
What is Net Export ?
" export - import "
positive net export - trade surplus
negative net export - trade deficit
weak currency exports make a country's trades competitive .
What is government expenditure?
Government expenditure refers to the purchase of goods and services, which include public consumption and public investment, and transfer payments consisting of income transfers (pensions, social benefits) and capital transfer.
When is the net export expenditure added or subtracted?
The net export expenditure is added incase of trade surplus , whereas it is subtracted incase of trade deficit
What is investment?
- Addition of the capital stock to the economy
Induced Investment is when firms spend money or capital to eventually increase their final output. To keep up with increasing demand in the market or their productivity.
Replacement investment does not add to the stock, just focuses on maintenance of current capital stock
Buying shares cannot be considered an investment because it is a form of savings. It is not capital and does not increase the final output.
Examples: Buying new machinery, upkeep and maintainence
Factors affecting consumption expenditure
Examples
Russian government - cutting expenditure elsewhere to fund the soldiers during the war [link]
Japanese Government - funding various sectors including education, defence , healthcare . https://www.nippon.com/en/japan-data/h01206/
UAE Government - investing in oil : buying oil at high prices and exporting the same at an even higher price [link]
Indian government - investing in more recreational activities for the welfare of people [link]
Changes in income tax
If income tax increases, people’s disposable income will decrease. As a result consumption will fall leading to a leftward shift in aggregate demand (fall in AD)
Changes in interest rates
If interest rates increase , people will tend to stop or lower the rate of borrowing . This will lead to a decrease in the expenditure of money, thus leading to a leftward shift of aggregate demand.
Changes in wealth
When people feel wealthier, the people are likely to spend more, thus increasing AD, leading to a rightward shift and vice versa
Level of indebtedness
The ability and willingness of households to take out loans has an impact on consumption. When consumption is high, aggregate demand increases
Inflation: An increase leads to
Trade policy : an increase
Exports: will reduce
Imports : will increase
Factors affecting investment
Business Tax: If there is an increase in corporate tax , it will reduce the incentive to invest and thus decreasing the aggregate demand
Interest Rates: An increase in the interest rates will lead to a reduction in incentives to borrow money , thus reducing investment and leading to a decrease in aggregate demand.
Technological advances: an increase in the same will lead to an increase in the investment to keep up with the market and competition. This will thus lead to an increase in aggregate demand.
Business expectations: if the company thinks that the consumer demand is likely to rise , then the company will be likely to invest more.
Level of corporate indebtedness: An increase in the level of indebtedness will lead to the reduction of investment.