Aggregate Demand (AD)

Definition

The term aggregate demand refers to the total demand for goods and services in an economy. An aggregate demand curve will specify the quantity of goods and services purchased at various price points.

Calculation

Aggregate Demand = Consumer Spending + Investment + Public Spending + Net Exports

Where:

  • Consumer Spending is the total value of all goods and services purchased.
  • Investment is the total of all corporate (private) purchases of equipment, buildings, factories and inventory.
  • Public Spending is the total of all government (local, state and federal) spending on goods and services. It does not include transfer payments such as Social Security.
  • Net Exports is equal to the total of all goods and services exported minus those imported.

Explanation

Also referred to as domestic final demand (DFD), aggregate demand, or AD, is the total of all demand for goods and services produced by an economy. In theory, this demand will vary by price, so aggregate demand is typically shown as a curve that demonstrates how demand will increase as price decreases. For this reason, it's typically depicted as a downward sloping curve as shown in the accompanying illustration.

aggregate demandAs is the case with Gross Domestic Product, or GDP, there are four components that make up aggregate demand:

  • Consumer Spending: includes all the goods and services purchased by families, does not include funding of investments.
  • Investment: includes the purchase of assets such as equipment, buildings, factories and items held in inventory. This would not include sales by businesses since this output would be captured in consumer or government spending.
  • Public Spending: this is the total of all goods and services purchased by agencies of the local, state and federal government. This would not include transfer payments, such as Social Security, since that spending would be captured in consumer spending.
  • Net Exports: this is the total net demand from non-domestic sources, the value is found by subtracting all imported goods and services from those exported. This value will be negative for countries that are net importers.

Related Terms

short-run aggregate supplylong-run aggregate supplybusiness cycleaggregate supply