Aggregate spending and the AD curve
| English | 中文 | Pinyin |
|---|---|---|
| net exports/net ˈekspɔːts/ | 净出口 | jìng chū kǒu |
| aggregate expenditure | 总支出 | zǒng zhī chū |
A decision you can investigate
- A household buys an imported phone while a firm buys a domestically produced machine. Both are expenditure, but their contribution to domestic demand differs.
- Aggregate demand concerns the economy’s production, not the demand for one product.
Build the explanation
- Aggregate demand is planned spending on domestic output at different general price levels over a period. Its components are consumption C, investment I, government purchases G and net exports 净出口 X−M. Imports are deducted because imported spending can already be inside C, I or G; the deduction isolates domestic production.
- A change in the general price level gives a movement along a given AD curve, other determinants held constant. A change in confidence, policy or foreign demand can shift AD at each price level. The macro downward slope can reflect real purchasing-power, interest-rate and international-competitiveness effects under stated conditions; it is not explained simply by the diminishing marginal utility of one good.
Work through the evidence
- Fictional aggregate expenditure 总支出 values for one period are C=320, I=80, G=120, X=100, M=90. Use AD=C+I+G+(X−M): AD=320+80+120+(100−90)=530. Without the import subtraction, the total 620 would include spending on foreign production.
- At the same price level, an independent rise in investment from 80 to 95 gives planned AD 545, a 15 increase before multiplier feedback. Government pension transfers do not directly purchase current output, so adding a pension payment 20 again to G would be wrong. The pension may instead influence household C. Buying an existing company share is financial investment, not new productive investment I in this account.
What is planned AD in the example?
Add the components and deduct imports 90.
What is the direct increase if investment rises by 15 at the same price level?
It directly increases the I component; multiplier effects require separate assumptions.
Government pension transfers enter G directly as purchases of current output.
They are transfers; any resulting household purchases enter C rather than being counted twice.
Test the limits
- The identity organizes expenditure; it is not a claim that any injection automatically raises real output by the same amount. Imports, capacity, prices and induced responses matter. If spending changes because the price level itself changes, trace a movement rather than shifting AD.
- A higher price for one imported input is not automatically an increase in the whole economy’s price level. The diagram’s horizontal axis is real national output and its vertical axis is the general price level. Keep nominal spending totals and volume measures consistent before drawing a quantitative prediction.
Which describes a shift of AD rather than movement along it?
A changed spending determinant moves the whole schedule.
Apply and explain your answer
- Why subtract imports instead of treating every household purchase as demand for domestic output?
- Imported purchases may already appear in spending components; subtracting M removes their foreign-production content.
Match the terms to their meanings.
Use each term for its stated economic relationship.
Use the terms precisely
- aggregate expenditure: Economy-wide expenditure on consumption, investment, public purchases and net exports under the stated accounting scope.
- net exports: Exports minus imports for the stated goods/services scope.
Fictional aggregate expenditure values for one period are C=320, I=80, G=120, X=100, M=90. Use AD=C+I+G+(X−M): AD=320+80+120+(100−90)=530. Without the import subtraction, the total 620 would include spending on foreign production. At the same price level, an independent rise in investment from 80 to 95 gives planned AD 545, a 15 increase before multiplier feedback. Government pension transfers do not directly purchase current output, so adding a pension payment 20 again to G would be wrong. The pension may instead influence household C. Buying an existing company share is financial investment, not new productive investment I in this account.
The identity organizes expenditure; it is not a claim that any injection automatically raises real output by the same amount. Imports, capacity, prices and induced responses matter. If spending changes because the price level itself changes, trace a movement rather than shifting AD. A higher price for one imported input is not automatically an increase in the whole economy’s price level. The diagram’s horizontal axis is real national output and its vertical axis is the general price level. Keep nominal spending totals and volume measures consistent before drawing a quantitative prediction.
Aggregate demand is planned spending on domestic output at different general price levels over a period. Its components are consumption C, investment I, government purchases G and net exports X−M. Imports are deducted because imported spending can already be inside C, I or G; the deduction isolates domestic production.