Aggregate demand

Aggregate demand ( aggregate demand ) is a macroeconomic indicator, the demand for end products and services of all macroeconomic agents at a certain time interval and at certain price levels.

Content

The aggregate demand function and its basic parameters

The relationship between the two models: the “ Keynesian cross ” (one of the most well-known ways of representing aggregate demand) and the classical aggregate demand curve

The classical model of aggregate demand and aggregate supply ( model AD-AS ). The aggregate demand curve has a negative slope

The function of aggregate demand is usually represented as a sum of four main sources of demand:

AD=C+I+G+X_{n}\

{\ displaystyle AD = C + I + G + X_ {n} \}

,

Where

$C\$ ${\ displaystyle C \}$ - consumption or consumer spending,
$I\$ ${\ displaystyle I \}$ - investments,
$G\$ ${\ displaystyle G \}$ - government procurement
$X_{n}\$ ${\ displaystyle X_ {n} \}$ - net export

Basic parameters

Consumer spending (ID) - household spending on goods and services. Consumer spending can be both autonomous (that is, independent of income level) and, conversely, dependent on earnings and the value of the marginal rate of consumption ( mpc ) (as far as expenses increase for each additional unit of disposable income ( Yd )). In this way,

C=C(autonomous)+mpc*Yd

{\ displaystyle C = C (autonomous) + mpc * Yd}

where

mpc={\frac {\Delta C}{\Delta Yd}}

{\ displaystyle mpc = {\ frac {\ Delta C} {\ Delta Yd}}}

Household savings (dec. S ):

S=S(autonomous)+mps*Yd

{\ displaystyle S = S (autonomous) + mps * Yd}

where

S(autonomous)=-C(autonomous)

{\ displaystyle S (autonomous) = - C (autonomous)}

;

mps={\frac {\Delta S}{\Delta Yd}}

{\ displaystyle mps = {\ frac {\ Delta S} {\ Delta Yd}}}

Investments (labeled I ). Firms buy capital to increase the production of goods and services in order to maximize profits.
Government purchases of goods and services (dec. G ) - government investments, salaries of government employees, etc.
Net export (symbol Xn or NX ) - the difference between export and import . The ratio of exports and imports shows the state of the trade balance . If exports exceed imports, then the country has a trade surplus, if imports exceed exports, then there is a trade deficit. Net exports can be both autonomous and dependent on the marginal rate of import ( mpm ) and the level of total output. Marginal propensity to import explains how the average increase in the flow of imported goods into the country with each additional unit of total income (or real GDP ).

Xn=Ex-Im

{\ displaystyle Xn = Ex-Im}

Xn=(Ex(autonomous)-Im(autonomous))-mpm*Y

{\ displaystyle Xn = (Ex (autonomous) -Im (autonomous)) - mpm * Y}

where

mpm={\frac {\Delta Im}{\Delta Y}}

{\ displaystyle mpm = {\ frac {\ Delta Im} {\ Delta Y}}}

Net taxes (symbol T ) —the difference between taxes and transfers . The ratio of government purchases and net taxes shows the state of the state budget . If government purchases exceed net taxes, then the country has a state budget deficit, respectively, a budget surplus means that net taxes exceed the amount of government purchases.

T=Tx-Tr

{\ displaystyle T = Tx-Tr}

Cumulative output (ID) is the sum of all items of expenditure, which determines GDP. the formula of aggregate output for an open economy, which determines the function of aggregate demand, is as follows ^[1] :

Y=C+I+G+Xn

${\ displaystyle Y = C + I + G + Xn}$ .

Value for aggregate demand

As a rule, the household sector represents the greatest weight in aggregate demand. In Russia, the share of this macroeconomic entity in the 90s was from 40 to 50%, in 2004 - 47.8%. Investments in 2004 accounted for approximately 21.2%, government purchases of goods and services - 16.1%, and net exports - 12.6% of GDP .

For comparison: in US GDP , consumer spending was about 70%, investment — 16.4%, government procurement — 18.9%, and net exports –5.3% ^[2] .

Reasons for the negative slope of the aggregate demand curve

John Maynard Keynes

Since aggregate demand is the sum of all demand and depends on the volume of total output, the negative slope of its function cannot be explained by microeconomic concepts, that is, by the effects of substitution and income . There are three main effects explaining the negative relationship between output and the price level in the economy, that is, the negative slope of the aggregate demand curve.

The effect of real wealth

The author of this idea was the British economist Arthur Pigou . The effect of real wealth, better known as the “Pigou effect,” suggests that as the price level increases, the size of the real wealth of the population falls, leading to a reduction in consumer spending. Thus, aggregate demand falls, and with it the level of output.

Interest Rate Effect

John Maynard Keynes suggested another explanation for this negative relationship. He believed that with an increase in the price level in the economy, the demand for money obviously grows. An increase in the demand for money, in turn, provokes an increase in the real interest rate. The growth of bank interest rates on loans is not welcomed by investors who prefer to finance business projects with loans from banks, and not from their own pocket. Thus, the growth in demand for money discourages investors, which, in turn, leads to a reduction in investment in the economy. Consequently, the release level falls.

Impact of import purchases

Robert Mundell

This effect is better known as the “Mandella-Fleming effect”, so named after its authors: Canadian Robert Mundell and English economist John Fleming . This effect is associated with the state of the trade balance of the country. He says that with an increase in the price level, the export of the country in question falls: the goods and services there become more expensive, and the imported goods are relatively cheaper for the population. Consequently, imports to the country increase and exports from it fall. It follows from this that the value of net exports decreases, and this suggests that the volume of total output falls.

Modeling Problems

Aggregate supply and demand are not statistical macroeconomic concepts intended to study the whole range of phenomena and processes that entail a cost imbalance between the volume of purchases and the volume of production of goods entering the same market at the same time. These concepts do not fit into the classification of scientific economic concepts (and therefore cannot be directly determined), differing in part by contradictory, partly vague features:

The concepts are based on the idea of the economic intentions of the aggregate buyer, on the one hand, and the aggregate seller, on the other. Both the end consumer (many individuals ) and the manufacturer (many legal entities ), who buys the means of production, act as buyers. The seller is both the manufacturer of the goods (the entire sphere of production of things and services) and the intermediary (the sphere of trade);
If, according to the definition, market entities have intentions to buy-sell, then why they do not realize them, and if we assume that intentions are realized, then Ockham’s fair question arises: why study intentions, if there is a reality? The answer is obvious: if we study reality, then it could be measured, which means we could check the speculations of theorists of the “demand-demand” method;
The concepts of aggregate demand-supply are deliberately blurred and, thus, do not fall under the model of “ scientific abstraction ” - bringing the idea of reality to such a state (free from essential features) when it can be easily formalized, made unambiguous and thus determined. Note that not only mathematics , but also theoretical physics and everything that is called science, rests on scientific abstraction. Although the model of “scientific abstraction” is deliberately different from reality, it assumes that ways of transition from abstraction to reality have been developed;
Without focusing on basic definitions, the “aggregate demand-demand” method is used for a logical and mechanistic analysis of the dynamics of interaction between different sides of the national economy, expressed in such macroeconomic indicators as: real GDP, price level, money supply outside the Central Bank , interest rate on loans and deposits, unemployment rate, bank reserve ratio, tax rate.
In the mass economic literature (both descriptive and research), each author interprets these concepts in his own way, for the most part far from the basic theory. Often these statistically defined macroeconomic indicators are understood by these terms, suggesting, usually in an implicit form, their own vision of economic relations.

Literature

Vugalter AL Fundamental savings. Dynamics. - Economy. - M. , 2007. - 371 p.
Matveeva T. Yu. Introduction to Macroeconomics . - “The Higher School of Economics Publishing House”, 2007. - 511 p.
David Begg , Stanley Fisher , Rudiger Dornbusch . Economics . - 8. - The McGraw Hill Companies, 2005. - p. 357. - 674 p. - ISBN 13: 978-007710775-8.

Notes

↑ This formula is a calculated formula for GDP by expenditure and total costs.
↑ Data for 2004

[1] This formula is a calculated formula for GDP by expenditure and total costs.

[2] Data for 2004

Aggregate demand

Content

The aggregate demand function and its basic parameters

Basic parameters

Value for aggregate demand

Reasons for the negative slope of the aggregate demand curve

The effect of real wealth

Interest Rate Effect

Impact of import purchases

Modeling Problems

See also

Literature

Notes

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