Question

What are the components of the aggregate demand (AD) curve?

Short answer

Components of the aggregate demand curve are Consumption expenditure, Government expenditures, Investment expenditure, and Net exports

Step-by-step solution

Concept introduction

Aggregate demand is the total demand for all commodities by various entities in an economy.

Consumption expenditure is household spending on commodities, except new constructions.

Investment expenditure refers to the money incurred by an individual, a corporation, or the government for the production of new capital assets.

Government expenditures are the purchase of assets, including public consumption and investment.

Net exports are the measurement of a country's entire export.

Explanation

There are four primary components that make up Aggregate demand:

• Consumption expenditures: Household consumption expenditures are the most important component of aggregate demand. This comprises household expenditures on goods and services. This component does not include expenditures made by households on newly constructed residences.
• Investment expenditures: The spending done by business entities is included in the investment expenditures. The company engages in a variety of investment operations, including the purchase of various goods and services as a form of investment. All of them, as well as household spending on the acquisition of newly constructed homes, are included in the economy's investment expenditures.
• Government expenditures: The government is also involved in the acquisition of products and services. Government expenditures, which are a component of aggregate demand, are the government's purchases of goods and services.
• Net exports: Exports are the sales of locally produced goods and services in international markets, whereas imports are the domestic companies' purchases of foreign goods and services. These net exports make up a part of total demand.