Aggregate demand is the sum of all consumer spending on goods and services produced in the economy.
This figure includes the following components:
- demand for consumer goods and services;
- demand for goods and services, which are supplied by the State;
- demand for investment products;
- demand for exports - the difference between the value of the goods bought by foreigners and those who have purchased the domestic consumers.
Let us consider what the aggregate demand and the factors that determine it.First the number of consumed products affect pricing factors.
- effect of the interest rate - the prices have an impact on the volume of production by the interest rate.Increase the value of the goods leads to the fact that people are trying to increase their cash flow.That is the demand for money.But if incomes are not growing in line with expectations, it decreases the amount of consumer spending and investment.
- effect of cash balances or wealth - have an impact primarily on consumer spending.For example, with the increase in prices is a decrease of purchasing power of money gradually depreciate.The accumulated financial assets of the population, in particular, bonds, term deposits, etc., are much lower than originally.People eventually become poorer, even keeping the money at home.
- effect purchases of imports - affect the value of exports.With the increase in prices is growing demand for foreign goods and reduced to the domestic.
But not only of the value of products and services to depend on consumer spending.Non-price factors of aggregate demand varied.They are divided into groups according to the order on which elements they affect.
- Factors affecting the consumption of products by households.
- The well-being of consumers - people spend their money, depending on the value of the assets they possess (real estate, bonds, stocks).So a sharp decline in their prices leads to the fact that people are starting to spend less and save more.
- Expectations of consumers - people depend on the forecasts.If they believe that in the near future there will be an increase in real income, the total demand for all goods is growing.And, accordingly, on the contrary, a sense of crisis in the economy leads to the fact that people are beginning to accumulate savings.
- Trade receivables - if people have a large number of loans, installments on previous acquisitions, the aggregate demand is sharply reduced.
- Taxation - reducing income tax rates leads to the fact that people will have more money to buy goods.
2. Non-price factors that cause changes in the cost of investment.
- Interest rates - when they are raising a reduction in investment spending.For example, consider a reduction in the money supply.Under the influence of this factor increases the interest rate, reduced contributions.
- Expected return on investment - aggregate demand increases with optimistic forecasts.
- Taxes levied on companies - with their growth reduced the amount that firms are willing to spend and their employees.
- production technologies - all contribute to the innovations that the company is ready to invest more.
3. Factors associated with changes in government spending.If the government ordered to buy national products, this will increase the total demand in the country.
4. Non-price factors that lead to changes in the procurement of net exports.
- national income in foreign countries - with its rise there is a possibility that the demand in the country will grow by exports.
- Exchange rates - affect the choice of consumers.Users decide which products to buy: imported or domestic.
thus on aggregate demand is constantly affected by many factors.
