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Components of Aggregate Demand
Levels: AS, A Level, IB Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC
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Aggregate Demand (AD) = total planned real expenditure on a country’s goods and A-Level Economics
services produced within an economy in each time period.
30-40 hours learning time
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The components of aggregate demand (AD)
and activities
The components of aggregate demand are:
All students preparing to sit A-Level
Household spending on goods and services (C) Economics exams in summer 2021.
Gross Fixed Capital Investment Spending and the Value of the Change in Stocks (I) Full course details ›
Government Spending on Public Services (G)
Exports of Goods and Services (X)
Edexcel A-Level
(minus) Imports of Goods and Services (M) Economics Study
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Components of aggregate demand in the UK in 2019 Theme 2
SKU: 02-4125-10990-01
Household consumption is the largest element of expenditure across the UK economy,
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accounting for 63% of the total in 2017.
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Government consumption accounted for 18% and investment for 17%. £30.00
C: Consumers' expenditure on goods and services: Also known as consumption, this
Edexcel A-Level
includes demand for durables e.g. audio-visual equipment and vehicles & non-durable
Economics Study
goods such as food and drinks which are “consumed” and must be re-purchased.
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I: Capital Investment – This is spending on capital goods such as plant and equipment Theme 3
and new buildings to produce more consumer goods in the future. Investment includes SKU: 02-4125-10991-01
spending on working capital such as stocks of finished and semi-finished goods Instant Download
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A small part of investment spending is the change in the value of stocks. Producers may
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find either than demand is running higher than output (i.e. stocks will fall) or that demand
is weaker than expected and below current output (in which case the value of stocks will
rise.)
G: Government Spending – This is spending on state-provided goods and services
including public goods and merit goods. Decisions on how much the government will
spend each year are affected by developments in the economy and the political priorities
of the government.
Government spending on goods and services is around 18-20% of GDP but this tends to
understate the true size of the government sector in the economy. Firstly some spending
is on investment and a sizeable amount goes on welfare state payments.
Transfer payments in the form of benefits (e.g. state pensions and the job-seekers
allowance) are not included in current government spending because they are a transfer
from one group (i.e. people paying income taxes) to another (i.e. pensioners drawing their
state pension having retired, or families on low incomes).
X: Exports of goods and services - Exports sold overseas are an inflow of demand (an
injection) into our circular flow of income and spending adding to aggregate demand.
M: Imports of goods and services. Imports are a withdrawal of demand (a leakage) from
the circular flow of income and spending.
Net exports measure the value of exports minus the value of imports. When net exports
are positive, there is a trade surplus (adding to AD); when net exports are negative, there
is a trade deficit (reducing AD). The UK has been running a large trade deficit for several
years now.
What is the formula for calculating aggregate demand?
The formula for aggregate demand is expressed as: AD = C+I+G+(X-M)
Where:
C+I+G = domestic demand
(X-M) = net exports (or the trade balance)
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Economics Study notes Aggregate demand Economic cycle External Shocks Demand Shocks
Macroeconomics Net Trade Business confidence Consumer confidence Animal spirits
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Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years
experience as Head of Economics at leading schools. He writes extensively and is a contributor and
presenter on CPD conferences in the UK and overseas.
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