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The National and the International Economy

The National and the International Economy. Aggregate Demand. Aims. In this lesson you will examine the meaning of aggregate demand and discover what influences the components of aggregate demand. You will distinguish between movements along and shifts in the aggregate demand curve.

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The National and the International Economy

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  1. The National and the International Economy Aggregate Demand

  2. Aims • In this lesson you will examine the meaning of aggregate demand and discover what influences the components of aggregate demand. • You will distinguish between movements along and shifts in the aggregate demand curve.

  3. Objectives • All students to be able to define aggregate demand and identify the components of aggregate demand. • Most students to identify what factors influence the components of aggregate demand. • A few students to be able to discuss reasons why AD may be beneficial to the UK economy.

  4. Further Reading Internet Text Book • http://economicsonline.co.uk/Managing_the_economy/Aggregate_demand.html

  5. Aggregate Demand • Aggregate demand is total spending on domestic output at a given price level. • There are four components of aggregate demand.

  6. Aggregate demand • Consumption. • Investment. • Government Spending. • And net exports (exports minus imports) • So, AD= C+I+G+ (X-M)

  7. Consumption • Consumption is the amount households spend on goods and services to satisfy their current needs and wants. • Consumption is the largest component of aggregate demand

  8. Consumption • The main influence on household spending is income, more specifically disposable income. • The more disposable income a household has the more it is able to spend. • In general, as income rises people usually spend more.

  9. Other factors effecting consumption • Wealth – if there is an increase in the value of assets, people are likely to feel more confident and will be able to borrow more based on the value of their assets.

  10. Other factors effecting consumption • Optimism about economic prospects. • If the economy is expected to grow, people are likely to anticipate greater job security, higher incomes and more promotion opportunities.

  11. Other factors effecting consumption • A fall in the rate of interest. • This makes it cheaper to borrow and reduces interest to save.

  12. Other factors effecting demand • Advances in technology. • New consumer products are created and households are encouraged to update existing products.

  13. Investment • Investment consists of spending by firms on capital goods including machinery, factories and offices. • It fluctuates more that the other components of aggregate demand.

  14. Investment • An increase in income. • A fall in the rate of interest. • Changes in expectations. • Advances in technology. • A fall in the cost of capital goods • A rise in profit levels. • Cuts in corporation tax. • An increase in government investment subsidies.

  15. The National and International Economy Government Spending and Net Exports

  16. Government Spending • Government spending includes spending on defence, healthcare and transport.

  17. Factors effecting Government Spending • A fall in real GDP • Tax Revenue • Demographic changes • Demand for merit and demerit goods. • Technology advances

  18. Net Exports • Net exports make a negative contribution to the UK’s aggregate demand.

  19. Factors effecting net exports • Income levels at home and abroad. • Price and quality of domestic and foreign products. • The exchange rate.

  20. The national and International Economy The aggregate demand curve and shifts in the Aggregate demand curve

  21. The aggregate Demand Curve • An aggregate demand curve plots aggregate demand at different price levels. • The curve slopes down from left to right showing as the price falls, aggregate demand extends.

  22. The aggregate Demand Curve • A lower price level will make UK products more price competitive, which should cause exports to rise and imports to fall. (This is known as the International Trade Effect). • A fall in the general price level is usually accompanied by a fall in interest rates. (Lower Interest rates are likely to result in a rise in investment and consumption)

  23. The aggregate Demand Curve A Diagram showing an extension in Aggregate Demand

  24. Shifts in aggregate demand • An increase in aggregate demand can be caused by, a fall in interest rates, a cut in direct taxes, a fall in the exchange rate, a rise in expectations and advances in technology.

  25. Shifts in aggregate Demand A diagram showing an increase in Aggregate Demand

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