Definition
Aggregate demand (AD) is the total dollar value of spending on finished goods and services within an economy over a specified time period. It sums spending by households, firms, government, and foreign buyers (net exports). AD is a macroeconomic measure of overall demand at a given price level, not a direct measure of production quality or living standards.
Core components and formula
AD is commonly written as:
AD = C + I + G + NX
where:
– C = consumer spending on goods and services
– I = private investment (business spending on equipment, structures, inventories)
– G = government purchases of goods and services (infrastructure, public services)
– NX = net exports = exports − imports
Worked numeric example
Suppose in a quarter:
– Consumer spending C = $9,000 billion
– Private investment I = $2,000 billion
– Government purchases G = $3,000 billion
– Exports = $1,200 billion; imports = $1,500 billion → NX = −$300 billion
Then AD = 9,000 + 2,000 + 3,000 − 300 = $13,700 billion.
Interpretation: The economy’s total spending that quarter equals $13.7 trillion at the measured price level.
How AD relates to GDP
Gross domestic product (GDP) measures the value of output produced, while aggregate demand measures the value of spending. In national accounts, the expenditure method of measuring GDP uses the same C + I + G + NX identity. In the short run, AD and GDP can diverge because AD is evaluated at a nominal price level; over the long run, after price adjustments, AD and real GDP align.
Graphical intuition
The aggregate demand curve plots total output (horizontal axis) against the overall price level (vertical axis). Like an ordinary demand curve, the AD curve slopes downward: higher price levels reduce the real purchasing power of money and thus total spending, producing movement along the curve. A shift of the whole AD curve to the right or left reflects changes in one of the components (C, I, G, NX) independent of the price level.
What moves aggregate demand?
Main drivers that shift the AD curve (change spending at a given price level):
– Consumer confidence and household income (affect C)
– Business expectations and interest rates (affect I)
– Fiscal policy: government spending and tax changes (affect G and C)
– Exchange rates, foreign income growth, and trade policy (affect NX)
– Monetary policy (affects interest rates and credit, altering C and I)
Demand vs. supply emphasis in macro theory
Two contrasting perspectives matter for policy:
– Supply-side view (e.g., Say’s law): production enables consumption; increases in output lead activity.