Check sibling questions

What is Demand?

It is customer's desire to purchase a product

It is related to a particular good or service so it is a concept of microeconomics

 

What is Aggregate Demand?

It means total demand of final goods and services of all sectors of an economy at a given level of income

Note

It includes total planned expenditure of all sectors of expenditure

It is a concept of macroeconomics

We can say

Aggregate Demand is

Total Value of All goods and Services

which all sectors of economy

are planning to buy

at given level of income

during one accounting year

AGGREGATE DEMAND.JPG

Important Points about  Aggregate Demand.JPG

Important Points About Aggregate Demand

It measures Total expenditure of all Sectors of economy like

Households, firms, Govt and Rest of World

It considers Planned Expenditure and not Actual Expenditure

It is measured for period of accounting year (From 1 April to 31 March), so it is a flow concept

It is measured at given level of income (it is because expenditure varies with level of income)

Is Aggregate Demand  Stock or Flow.JPG

Which expenditure are taken while calculating Aggregate Demand?

or

What are the components of Aggregate Demand?

It covers 4 types of Expenditure

Private Household Consumption Expenditure ( C )

Investment Expenditure (I)

Government Expenditure (G)

Net Exports (X-M)

Components of Aggregate Demand.JPG

Lets learn about it in detail

 

Private Final Consumption Expenditure

It includes expenditure of households and individuals on different expenses like food, clothing, car etc

It depends upon disposable income of individual (Income -Tax)

 

Investment Expenditure

Investment in Capital goods like Plant and Machinery, Building during a financial year

In this chapter, we take it as autonomous or fixed

 

Government Expenditure

All expenses made by Govt during a financial year

This may be consumption expenditure or Investment expenditure

 

Net Exports

Net Exports are Exports - Imports

Exports are Sale of Goods and service outside domestic territory

Import are Purchase of goods and service from outside territory

We reduce Import from Export to get Net Exports

 

Hence,

Aggregate Demand = private Consumption Exp + Investment Expenditure + Govt Spending Expenditure + Total Exports -Total Imports

AD = C + I + G + X - M

 

However, as per NCERT Syllabus

Aggregate Demand = Consumption Exp + Investment Expenditure

AD = C+I

 

What is formula for Aggregate Demand as per NCERT Syllabus?

For the purpose of this chapter, we consider only 2 sectors - Households and Firms

So we consider only 2 expenditures

Aggregate Demand = Private Consumption Exp + Investment Expenditure

AD = C+I

This is because in Macroeconomics, We follow 2 Sector Model of Economy

Two Sector Model of Economy - Teachoo.jpg

Lets learn about Consumption Expenditure and Investment Expenditure in Detail

 

NCERT Questions

No questions in this part

Other Books

Question 1

Define Aggregate Demand?

State its components.

View Answer

Introducing your new favourite teacher - Teachoo Black, at only ₹83 per month


Transcript

AGGREGATE DEMAND of all Sectors Value of goods and services which Customer desire to Purchase Aggregate Demand is Total Value of All goods and Services Which all sectors of economy Are planning to buy At given level of income During one accounting year Important Points about Aggregate Demand Aggregate Demand is Total Value of all goods and Services Which all sectors of economy Are planning to buy At given level of income During one accounting year It is Measured in Amount, not quantity It Covers expenditure of goods as well as services It Covers all sectors (Households, firms, Govt and External Sector) It covers planned expenditure, Not actual expenditure It changes with change in Income It is Measured from 1 April to 31 March Is Aggregate Demand Stock or Flow? This is Flow This is Stock Difference Between Stock and Flow Stock It is variable measured at a Particular Point of time Example Amt of Water in a Glass Flow It is variable measured over a period of time period Example Amount of water flowing from tap Aggregate Demand is measured Over a period of time, so it is a Flow Components of Aggregate Demand Different Sectors of Economy Household Firm Government External Sector Different Expenditure Private Household Consumption Expenditure (C ) Investment Expenditure (I) Government Expenditure (G) Net Exports (X-M) Aggregate Demand covers total expenditure of all these Sectors AD=C+I+G+X-M However, in NCERT Syllabus, we follow 2 Sector model There are Only 2 Sectors-Firms and households AD=C+I Two Sector Model of Economy We assume only 2 Sectors-Firm and Households Households They incur expenditure such as Firms They incur expenditure Such as Food Building Clothing Machinery All these expenditure is for Use (Consumption) So, it is called Consumption Expenditure (C ) All these expenditure is for Increasing Production Capacity So, it is called Investment Expenditure (I) Note Aggregate Demand is total of these two Expenditures Aggregate Demand(AD) =Consumption Expenditure (C) +Investment Expenditure (I)

CA Maninder Singh's photo - Expert in Practical Accounts, Taxation and Efiling

Made by

CA Maninder Singh

CA Maninder Singh is a Chartered Accountant for the past 12 years. He also provides Accounts Tax GST Training in Delhi, Kerala and online.