An introduction to the components of Aggregate Demand
Aggregate demand is the aggregate or total expenditure on final goods and services
produced in the domestic economy, at a range of price levels, during a given time
period (usually a year).

Consumption expenditures are undertaken by the household sector. These are
expenditures that normal, everyday people make on food, clothing, entertainment,
and a host of other wants-and-needs satisfying commodities.

Investment expenditures are made by the business sector. These are
expenditures by business firms for _____________________ goods, including
factories, buildings, machinery, and equipment.

Government purchases are from the government sector. These are expenditures
for the acquisition of the goods and services used to do what governments do -build streets, educate students, defend the nation, etc.

Net exports are expenditures by the foreign sector. These are actually the
difference between _______________ (goods purchased by the foreign sector)
and ________________ (goods purchased from the foreign sector).
So Aggregate Expenditure (AE) (or Aggregate Demand(AD)) is the sum of consumption
expenditures (C), investment expenditures (I), government purchases (G), and net exports
(X - M).
AE/AD = C + I + G + (X-M)
1. Consumption Expenditures
Consumption expenditures are the expenditures by the household sector on final
goods and services undertaken in a given time period.
We will find it useful to distinguish between three specific types of consumption:

Durable goods: These are tangible goods that tend to last for more than a year.
Common examples are ___________________________________. Durable
goods constitute about 10-15% of consumption expenditures in More Developed
Economies (MDC).

Nondurable goods: These are tangible goods that tend to last for less than a year.
Common examples are ______________________________. Nondurable goods
constitute about 25-30% of consumption expenditures.

Services: These are intangible activities that provide direct satisfaction to
consumers. Common examples include ____________________________.
Services constitute about 55-60% of consumption expenditures.
Question:
1. How would this expenditure pattern above change as a result of falling incomes
across an MDC?
2. Investment Expenditures
Investment expenditures are the most volatile and unstable of the four aggregate
expenditures.
Investment expenditures are the expenditures by the business sector on final goods
and services, in particular, capital goods like factories and equipment, undertaken
in a given time period.
3. Government expenditure/purchases
Government purchases are the expenditures by the government sector on final goods
and services undertaken in a given time period.
Government purchases are certainly important to the economy for the goods and services
provided (national defense, education, roads). However, they are also important as a tool
of stabilization policy as a means of affecting aggregate demand and controlling
business-cycle instability.
4. Net Exports
Net exports are the difference between exports, goods and services produced by the
domestic economy and purchased by the foreign sector, and imports, goods and
services produced by the foreign sector and purchased by the domestic economy.
Net exports, _____________ minus ________________, provide an overall picture of
how our domestic economy interacts with the foreign sector. We buy from them, they
buy from us. It's frequently useful to see the "net" flow between the domestic economy
and foreign sector.
TASK: Components of GDP/AD: World statistics
Consider the following information and answer the questions that follow:
Remember that: AD = C + I + G + (X-M)
Economy
World
Hong Kong
China
Sweden
Saudi Arabia
Pakistan
United States
United
Kingdom
Kenya
Components of GDP % total (all figures for 2008)
Private
Investment Public consumption/ Exports
consumption
Gov’t spending
C
I
G
X
61
22
17
27
59.9
20.3
8.1
36.4
40.9
39.7
47.4
26.3
51.4
17
25.2
62.2
74.9
21.4
11.2
13.9
69.9
16.4
11.1
63.2
18.2
21.7
18.8
16.3
25.1
1. Fill in the blank figures in the table above
2. Explain why the world economy’s value of exports = value of imports
3. Identify and shade the LDC’s in the table above
4. Complete the table below, identifying the countries with the highest/lowest
percentage of GDP values for each component of GDP.
Highest % of GDP- Private consumption
Lowest % of GDP- Private consumption
Highest % of GDP- Investment
Lowest % of GDP- Investment
Highest % of GDP- Public consumption
Lowest % of GDP- Public consumption
Highest % of GDP- Net exports
Lowest % of GDP- Net exports
Imports
M
-27
-196.7
-31.9
-43.2
-30.7
-16.9
-29.5
-37.5