The definition of aggregate demand is the sum of the expenditure on goods and services that companies and the State are willing to buy at a given price level in a specific period of time.
On some occasions, the concept of aggregate demand is used as a synonym for Gross Domestic Product (GDP), by measuring the same.
How to calculate aggregate demand
To calculate aggregate demand, the same formulas used to calculate GDP are usually used. In any case, aggregate demand is linked to expenditure, therefore it is calculated by the product system, that is, from the perspective of what society spends. For this, the spending of individuals or families is taken into account, what is spent on investment, net exports (difference between imports y exports) and government spending.
In this way the formula for aggregate demand would be the following:
DA = C + I + G + (X - M)
Where the components of aggregate demand would be:
- Consumption: the spending of families on services and goods, even those made in other countries.
- Investment: refers to the investment section of companies, which include rents, capital goods, machinery, etc.
- Public expenditure: the acquisitions made by any public administration, whether services or goods. Expenditures on pensions or benefits are not included here.
- Exports: items manufactured in one country and purchased by other countries.
- Imports: goods manufactured in another country and purchased by residents in another territory.
Aggregate demand is also understood through the formula:
DA = Domestic demand + net exports
In addition to assessing the sector in which the expense occurs, the location of the expense is also included. When exports are higher than imports, it means that more has been sold than was bought abroad and there will be a positive difference that will join the rest of the expenditure.