Aggregate demand (AD) is the total amount of final goods and services acquired in a period by the agents that make up an economy (households, companies, non-profit institutions, general governments and the foreign sector).
Aggregate demand comprises:
- Private consumption (C): Fundamentally comprises the final consumption of families, such as food, clothing, beverages, home rentals, energy, durable consumer goods (cars, appliances…), health, leisure, etc.
Home purchases are not included as household consumption, but as investment.
- Gross investment or gross private capital formation (I): Includes purchases of machinery (including software) and buildings, as well as the stock building (inventories or stocks) by companies. When changes in inventories are excluded, we find gross fixed capital formation, which comprises expenditures on goods that are to be used to produce other goods.
- Government consumption and investment expenditure (G) includes the expenses that the general or local governments carry out in a given period. Within these expenses, we can distinguish the following: Operating expenses, which are those devoted to financing current expenses; capital expenditures, which are used for the acquisition of investment goods.
- Net exports (X – M): Difference between exports (X) and imports (M). Exports represent the goods and services that, being produced in an economy, are sold to the rest of the world. Such exports translate into income. Imports correspond to goods and services that, being produced abroad, are acquired in an economy to meet the needs of its economic agents. Such imports translate into expenses.
The sum of the components Private consumption, Private investment and Government expenditure gives rise to domestic demand:
Domestic demand: C + I + G
On the other hand, net exports represent the balance with the foreign sector, which can be positive if exports are greater than imports, or negative if imports exceed exports:
Balance with the foreign sector: X – M
