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Variations in economic activiy, Look at components which use aggregate…
Variations in economic activiy
Aggragate demand
Refers to the total expenditure on all final goods and services produced in the economy
Components of AD
Aggregate demand = consumption + investment + goverment expenditure + (exports - inports)
government spending
the total spending by the government in the economy
Types of government expenditure
Capital expenditure
Investment projects financed by the government, such as roads and bridges
Transfer expenditure
Welfare payments such as unemployment or house benefits
Current expenditure
The day-to-day running of the government sector such as paing the wages of teachers and doctors
Types of government spending
Taxation
Borrowing
fiscal policy
Political objectives
Investement
The total spending on capital goods by firms
Types of investments
Human investment
When firms allocate resources to education and training, which increases labour's capacity
Research and development
Investemnts in new products and processes
Fixed investment
When firms purchase plant and machinery
Social investment
Allocating resources that can improve the future of the welfare of the country's citizens
INfrastructure investment
Allocating resources to the major physical system that a coutnry's population
Determinants
Availability of funds
Interest rates
Business confidence
Corporate indebtedness
net exports
The difference etween the revenue gained from selling gooods or services abroad and he expenditure on goods of services from abroad
Imports and exports
Imports
Goods and services produced overseas and sold in the domestic economy
Exports
Domestically produced goods and services sold in overseas markets
Tereminants of net exports
Economic growth in domestic markets
Exchange rate
Economic growth in overseas markets
Trading strength
Consumption
The total spending of goods and services by consumers
Determinants on consumptio
INterest rates
Consumer confidence
Household income and consumption
Wealth
INflation
HOusehold indebtedness
Each compoenent contributes to AD
Relationship with economic growth
If it increases= economic growth has occurred
If it decreases= there is a fall in economic growth
Aggregate demand curve
Shows the relationship between average price level and the demand for the real output of GDP
Can be seen in the same was as the demand graph
Downward sloping
Negative relationship between avarage price level and outpur of real GDP
With higher average price levels, there is less aggregate demand
With lower average price levels, there is greater aggregate demand
Changes in AD curve
Movements along the AD curve
When there is a change in the average price level in the economy, there is movement along the AD curve
https://saylordotorg.github.io/text_money-and-banking-v2.0/section_25/c6401b2daa980972a5929457c0dac853.jpg
Diagram analysis
Increase in AP (avarage price level) from i2 to i3
leads to a movement along the AD curve from A to B
Contraction on real GDP from Y2 to Y3
Decrease in AP (avarage price level) from i2 to i3
Leads to movement along the curve from A to C
Expansion on real GDP from Y2 to Y1
Shifts of the AD curve
When there is a change in a non-price determinant of aggregate demand, there will be a shift of the AD curve
https://analystprep.com/cfa-level-1-exam/wp-content/uploads/2019/10/16f-h-768x572.png
Diagram analysis
Increase in a non-price determinant of AD results in a shift to the right of the entire curve from AD 1 to AD2
A every price level, real GDP has increased from Y1 to Y2
Decrease in any f the non-price determinants of AD results in a shift to the left of the entire curve from AD1 to AD 3
At every price level, real GDP has decreased from Y1 to Y3
https://cdn-ilcgdmp.nitrocdn.com/ZNZGaPUCQqgkHHGdlFKJfPiIeULNhire/assets/images/optimized/rev-9a00879/studymind.co.uk/wp-content/uploads/2023/03/220634.png
Look at components which use aggregate demand in notebook