Business, Legal & Accounting Glossary
Aggregate demand is an economic term that refers to the total demand for goods and services in a country’s economy at a given period of time and price level. Aggregate demand reflects the gross domestic product of the country at a static inventory level. In simple terms, it represents a horizontal summation of demand schedules of all the goods and services produced in the country in a particular year. Aggregate demand schedule or curve aids in analyzing the relationship between the total goods and services purchased, as represented in the GDP or GNP and the general price level, as represented by a comprehensive price index, in the national economy.
Aggregate demand is the total demand in an economy for a given length of time. The phrase “aggregate demand” can be also be understood as “aggregate expenditure,” as it is always expressed in terms of expenditure on services and products. The aggregate demand for any economy is expressed in the function:
Y = C + I + G + (X-M)
Y = aggregate demand
C = consumer expenditures
I = business expenditures
G = government expenditures
X = total value of all exports
M = total value of all imports
Therefore, aggregate demand is the total expenditures in an economy plus net imports.
This formula for determining aggregate demand is credited to John Maynard Keynes, commonly considered to be the founding theorist of modern macroeconomics. Governments often cite aggregate demand when determining fiscal policy or adjusting the money supply. Business cycles, inflation and other economic phenomena are all affected by aggregate demand, and vice-versa.
According to Keynes, aggregate demand can be divided into smaller schedules whose interrelationships define macroeconomic phenomena such as inflation, economic growth and business cycles. Accordingly, he formulated the aggregate demand identity that is frequently used to determine national income.
Aggregate supply represents the total supply of goods and services in a country during a specified time period. The aggregate supply curve or schedule aids in determining the relationship of total production and sale of goods and services in the national economy and the general price level that is measured by a comprehensive price index. Aggregate supply is represented in three forms. These are the short-run aggregate supply, medium-run aggregate supply and the long-run aggregate supply.
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This glossary post was last updated: 28th March, 2020 | 3 Views.