Question

Explain the components of aggregate demand.
Or
State components of AD. Describe any one.

Answer 1

Explanation:

The components of aggregate demand are:

1) Private (or Household) consumption demand

• (a) The total expenditure incurred by all the households of the countiy on their personal consumption is known as private consumption expenditure.
• (b) Consumption demand depends mainly on disposable income and propensity to consume.

2) Private investment demand

• (a) Private investment demand refers to the demand for capital goods by private investors.
• (b) It is addition to the existing stock of real capital assets such as machines, tools, factory-building etc.
• (c) Investments demand depends upon marginal efficiency of capital (Marginal efficiency of investment) and interest rate.
• (d) Investment is of two types, Autonomous Investment and Induced investment, but in Keynes theory investment assumed to be Autonomous.

3) Government demand for goods and services

• (a) In a modem economy, the government is an important buyer of goods and services.
• (b) The government demand may be on account of public needs for roads, schools, hospitals, power, irrigation etc, for the maintenance of law and order and for defence.

4)Demand for net export (X – M)

• (a) Net export represents foreign demand for goods and services produced by an economy.
• (b) When exports exceed imports, net exports is positive and when imports exceed, net exports is negative.
• (c) Exports and imports of a country are influenced by a number of factors such as foreign trade policy, exchange- rate, prices and quality of goods etc.

Thus, aggregate demand consists of these four types of demand.

AD = C + I + G + (X – M)

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Answer 2

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