What is Aggregate Demand Formula?

Aggregate demad is the total demand from all consumers for goods and serviced produced in an economy in a given time period. 

AD Formula

In the formula AD = C+I+G+(X-M)

• C = Consumption which is the total value of goods and services purchased by domestic consumers.
• I = Investment which is the spending by firms on capital goods needed to produce their own goods and services such as machinery.
• G = Government spending which is the spending by government of infrastructure (capital spending) and public services (current spending) Note this does not include welafre payments such as pensions (transfer pricing)
• X-M = Net trade which is the total value of exports leaving the UK minus the total value of imports entering the UK.

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The Aggregate Demand Curve

The diagram shows that the AD curve slopes right. This is because

• As the price level falls consumers are able to purchase more goods and services.  Their real incomes have increased. (Consumption factor)
• Interest rates tend to fall when the price level falls which increases firms investment due to a improvement on their Return on Investment. (Investment factor)
• If UK prices are falling then our exports become cheaper relative to other countries causing more to be sold.  Imports become more expensive relative to other countries so consumers switch from producing imports to domestically produced goods. (Net trade factor)

Downward sloping AD curve