Explain the components of aggregate demand.
OR
State components of AD. Describe any one.
OR
State components of AD. Describe any one.
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The components of aggregate demand are:
AD = C + I + G + (X - M)
- Private (or Household) consumption demand:
- The total expenditure incurred by all the households of the country on their personal consumption is known as private consumption expenditure.
- Consumption demand depends mainly on disposable income and propensity to consume.
- Private investment demand:
- Private investment demand refers to the demand for capital goods by private investors.
- It is addition to the existing stock of real capital assets such as machines, tools, factory-building etc.
- Investments demand depends upon marginal efficiency of capital (Marginal efficiency of investment) and interest rate.
- Investment is of two types, Autonomous Investment and Induced investment, but in Keynes theory investment assumed to be Autonomous.
- Government demand for goods and services:
- In a modern economy, the government is an important buyer of goods and services.
- The government demand may be on account of public needs for roads, schools, hospitals, power, irrigation etc, for the maintenance of law and order and for defence.
- Demand for net export (X - M):
- Net export represents foreign demand for goods and services produced by an economy.
- When exports exceed imports, net exports is positive and when imports exceed, net exports is negative.
- Exports and imports of a country are influenced by a number of factors such as foreign trade policy, exchange rate, prices and quality of goods etc.
AD = C + I + G + (X - M)
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