Components of aggregate demand

Components of aggregate demand - relatively more valuable...

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Components of aggregate demand The fourth piece of the aggregate demand equation is G. Government spending encompasses every expenditure made by the government. The total amount of money spent by the government is often surprising. In fact, it is not unusual for government spending to constitute upwards of one third of gross domestic product. The level of government spending is a hotly debated topic as political parties vie for their programs in the annual budget. Examples of government spending include salaries to government employees, defense spending, welfare and social security programs, and foreign aid. The fifth piece of the aggregate demand equation is NX(e). Net exports are defined as the difference between exports and imports. It is important to recognize that net exports are dependent upon the real exchange rate. As the real exchange rate rises, domestic currency is
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Unformatted text preview: relatively more valuable and thus the price of domestic goods is relatively more expensive than the price of foreign goods. In this case, exports fall and imports rise, causing net exports to decline. Interestingly, a thriving domestic economy will result in a higher real exchange rate and thus lower net exports. Examples of exports include cars and electronics made in the US and sold Asian countries. Examples of imports include fruits and vegetables grown in New Zealand and sold in the US. The equation for aggregate demand of Y = C(Y - T) + I(r) + G + NX(e) has now been deciphered. This equation has many meanings such as output, national income, and GDP. It is difficult, or impossible, to think of economic activity that is not represented in the aggregate demand equation. This is the idea of aggregate demand: to capture all economic activity within an economy...
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