Components of Aggregate Demand

Aggregate demand is the total demand for all goods and services, made up of four different components:

• Consumer expenditure - spending by households on consumer goods. Affected by disposable incomes, interest rates and consumer confidence
• Investment - spending by firms on capital goods. Affected by profits, interest rates and business confidence
• Government spending - spending by governments in order to provide public services such as healthcare, education and infrastructure. Affected by stages in the economic cycle, proximity to elections and political ideology
• Net exports - spending on exports as an inflow from abroad, minus spending on imports as a leakage to other countries. Affected by incomes at home, incomes abroad and exchange rates

Watch the video below for more detail on how each of these components will be influenced by changing economic variables