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Concept of AD (Aggregate Demand)


 Concept Of AD (Aggregate Demand) 

in macroeconomics, AD refers to demand for all goods and services in the economy during a period of time (generally, one year). It is impossible to add up physical quantities of all the goods demanded in the economy. Accordingly, AD is measured in terms of expenditure on the goods and services. Expenditure broadly categorised as consumption expenditure and investment expenditure. It is also categorised as private expenditure and government expenditure. Expenditure on the domestically produced goods by rest of the world is taken as exports. Expenditure by our residents on the goods produced in rest of the world is taken as imports. Thus, AD may be defined as the sum total of expenditure on the domestically produced goods and services during the period of an accounting year.

AD refers to the sum total of expenditure on the domestically produced goods and services during the period of an accounting year.

2) 1 (Private Investment Expenditure) It refers to expenditure by private investors on the purchase of such goods which add to their stock of capital. Investment implies increase in the stock of capital, also called capital formation, as noted earlier. Investment is broadly classified as: (1) induced investment, and (ii) autonomous investment. Induced investment depends on the rate of interest: higher the interest rate (or interest cost) lower the investment, and vice versa. Autonomous investment (also called independent investment) is independent of the rate of interest. It depends on considerations like business expectations' in the private sector and considerations like 'social welfare' in the government sector. Autonomous investment is also independent of the level of existing GDP (income) in the economy.

G (Government Expenditure) It includes both government consumption expenditure and government investment expenditure. Government consumption expenditure is the expenditure on the purchase of consumption goods, meant for collective consumption. Government investment expenditure is expenditure on the construction of roads, dams and bridges.

(4) X-M (Net Exports) 

Exports refer to demand for domestically produced goods by the rest o the world. Imports refer to demand by our residents of the good produced abroad. Accordingly, expenditure by the foreigners on our goods is added to total expenditure (or AD) in the economy, while expenditure on imports is subtracted. Thus, it is X-M (net exports which is another component of AD.

Thus, AD is measured in terms of the following components: AD=C+1+G+X-M

Here, AD Aggregate demand

C=Private consumption expenditure

1 = Private investment expenditure G = Government expenditure

(Both consumption as well as investment expenditure) X-M-Net of exports.

it must be noted that in the context of macroeconomics, C means desired private consumption expenditure, 1 means desired private Investment expenditure, G means desired government expenditure, and X-M means desired net of exports. These are the expenditures what the households, firms, the government and rest of the world wish to make (or plan to make) on the purchase of domestically produced goods and services during an accounting year.

AD SCHEDULE 

AD schedule is a table showing desired expenditure of the people at their different levels of income. For the sake of simplicity, we are considering a closed economy with no government. So that desired expenditure of the people (or AD) consists of only two components viz Cand 1. Accordingly, AD schedule may be defined as a table showing combined behaviour of C and I corresponding to different levels of Y in the economy.AD schedule is a table showing combined behaviour of C and 1 corresponding to different levels of Y in the economy.

tis obvious that, corresponding to a higher level of income, people plan higher expenditure. Lower income would mean lower expenditure. So that, there is a positive relationship between income (Y) and expenditure (AD). However, two important points must be noted in this context:

At the very low level of Y (income), AD may be greater than Y (expenditure may be greater than income). Because, some minimum expenditure is always expected in the economy, no matter what the level of income is.

At higher levels of Y, expenditure is often less than income (AD <Y), This is because, at higher levels of Y, people start saving a part of their income.

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