What are the important components of Aggregate Demand ?
Answers
Answer:
There are four components of Aggregate Demand (AD); Consumption (C), Investment (I), Government Spending (G) and Net Exports (X - M). Aggregate Demand shows the relationship between Real GNP and the Price Level.
Notes on Aggregate Supply and its Component!
Aggregate supply is the money value of total output available in the economy for purchase during a given period. When expressed.
In physical terms, aggregate supply refers to the total production of goods and services in an economy. It is assumed that in short run, prices of goods do not change and elasticity of supply is infinite.
At the given price level, output can be increased till all resources are fully employed.
If we go deep, we will find that aggregate supply is represented by national income. How? We know that the money value of final output is distributed as rent, wages, interest and profit among factors of production which help to produce the output. From producers’ point of view, it is the cost of producing goods and services which they must recover from sale of output; otherwise, they will not produce the output.
Since the sum of factor incomes (rent, wages, interest and profit) at national level is called national income, therefore, aggregate supply (AS), output and national income are same. Alternatively, AS = Y where Y is national income. Thus, income or total output measures the aggregate supply of goods and services.
Aggregate Supply = Output = Income
Components:
Main components of aggregate supply are two, namely, consumption and saving. A major portion of income is spent on consumption of goods and services and the balance is saved. Thus, national income (Y) or aggregate supply (AS) is sum of consumption expenditure (C) and savings (S).
Put in the form of an equation:
AS = C + S, i.e., Y = C + S
AS curve is depicted in the Fig. 8.2 Aggregate supply or national income is shown on X-axis and total spending (Consumption + saving) on Y-axis. AS curve is artificially represented by a 45° line from the origin why? Because every point on this line is equidistant from X-axis and Y-axis taking same scale on both the axes, i.e., each point on this line indicates Expenditure (AD) = Income (AS).
Thus 45° line (also called a Guide line) helps us to identify equilibrium when two variables are to be shown graphically equal. That is why AS curve is represented by a 45° line so that when AD curve intersects it, AD becomes equal to AS. Thus, every point on 45° line represents AD = AS (i.e., equilibrium).