Aggregate demand is total demand for final goods and services in an economy at a given time.
This is calculated by adding the spending from all groups in the economy:
- Households undergo consumption (C)
- Businesses undergo investment (I)
- Governments undergo government spending (G)
- Overseas contributes the trade balance – exports minus imports (X-M)
Hence overall, aggregate demand (AD) = C + I + G + (X-M). Note that AD = Y at equilibrium, and so also, Y = C + I + G +(X-M)
Watch the video to learn about aggregate demand and its components in HSC Economics: