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Question
Write the answer in ‘one’ or ‘two’ paras.
What are the main determinants of aggregate demand?
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Solution
Aggregate demand is the summation of consumption expenditure (C), investment expenditure (I), government expenditure (G) and net earnings from foreign transactions (X – M).
where, X is exports and M is imports
AD = C + I + G + (X – M)
The following are the determinants of aggregate demand:
- Consumption expenditure (C): Consumption expenditure refers to the total expenditure incurred by all the households in an economy on different types of final goods and services in order to satisfy their wants. There are two types of consumption expenditure - Autonomous consumption expenditure and Induced consumption expenditure.
- Investment expenditure (I): Private investment expenditure refers to the planned (ex-ante) total expenditure incurred by all the private investors on the creation of capital goods, such as expenditure incurred on new machinery, tools, buildings, raw materials, etc. Broadly, investment can be categorised into two types- Autonomous investment expenditure and Induced investment expenditure.
- Government expenditure (G): Government expenditure refers to the total planned expenditure incurred by the government on consumption and investment purposes to enhance the welfare of the society and to achieve higher economic growth rates. The government expenditure comprises both investment expenditure and consumption expenditure.
- Net exports (X – M): Net exports of a country refer to the difference between the demand for domestically produced goods and services by the rest of the world (exports) and the demand for goods and services produced abroad by the residents of that country.
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