Aggregate demand
From Economypedia.com
Aggregate demand is an economic term that refers to the total demand of goods and services in a country’s economy at a given period of time and price level. Aggregate demand reflects the gross domestic product of the country at a static inventory level. In simple terms, it represents a horizontal summation of demand schedules of all the goods and services produced in the country in a particular year. Aggregate demand schedule or curve aids in analyzing the relationship between the total goods and services purchased, as represented in the GDP or GNP and the general price level, as represented by a comprehensive price index, in the national economy.
According to Keynes, aggregate demand can be divided into smaller schedules whose interrelationships define macroeconomic phenomena such as inflation, economic growth and business cycles. Accordingly, he formulated the aggregate demand identity that is frequently used to determine national income. The aggregate demand identity is as follows:
Y = C + I + G + (X-M)
Y represents the aggregate demand for national product, which equals the sum total of demand for household consumer goods and services (C), demand for investment goods (I), government’s demand for goods and services (G) and the net demand of export goods and services produced in the home country. X represents export demand; whereas M represents import demand.
Aggregate supply
Aggregate supply represents the total supply of goods and services in a country during a specified time period. The aggregate supply curve or schedule aids in determining the relationship of total production and sale of goods and services in the national economy and the general price level that is measured by a comprehensive price index. Aggregate supply is represented in three forms. These are the short-run aggregate supply, medium-run aggregate supply and the long-run aggregate supply.
