Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Looking into What Everyone Wants:


Aggregate Demand

Economies run on people, firms and governments requiring and buying things. A need exists (demand) that firms fulfil (supply). Students of

microeconomics spend time learning about the behaviour of supply and demand in individual markets. (See our other book Microeconomics for Dummies.) Students of macroeconomics are interested in the economy as a whole, so the emphasis is on aggregate (that is, total) demand for goods and services and aggregate (total) supply.


More specifically, aggregate demand comprises the total demand for goods and services in an economy.

Aggregate demand is important because (along with aggregate supply) it determines a country’s GDP and price level (and therefore its inflation rate). Changes in aggregate demand also impact the level of unemployment.

Without understanding aggregate demand, policy makers would not stand much of a chance of being able to control the economy. Indeed the main tools that policy makers have at their disposal (monetary and fiscal policy) work by influencing aggregate demand (see Chapters 9–11).

Meeting the Components of Aggregate Demand

Economists conveniently break aggregate demand down into four different components:

Consumption (C): Household demand for goods and services.


Investment (I): Firm demand for capital goods but also household demand for new housing.


Government purchases (G): Government demand for goods and services.


Net exports (NX): The demand of people living abroad for goods and services produced domestically, less domestic demand for foreign goods. That is, net exports (NX) = exports (X) – imports (M).

Adding all these components together gives total expenditure on goods and services. Now, the total expenditure on goods and services must equal total

output or GDP (Y), and so the components of AD must add up to equal Y:

Or equivalently