Aggregate demand and factors affecting it

Aggregate demand is the sum of all consumer spending on products and services produced in the economy.

This indicator includes the following components:

- Demand for consumer services and goods;

- Demand for services and goods that are supplied by the state;

- demand for investment products;

- Demand for export goods is the difference between the quantity of goods purchased by foreigners and that purchased by domestic consumers.

Let us consider in more detail what is the aggregate demand and the factors that determine it. First of all, the price factors influence the quantity of consumed products.

1. Effect of interest rate - prices affect the volume of production through the interest rate. Increasing the cost of goods leads to the fact that people are trying to increase their cash flow. That is, the demand for money is increasing . But if the incomes of the population do not grow in line with expectations, then the amount of consumer spending and investment decreases.
2. The effect of cash balances or wealth - has an impact primarily on consumer spending. For example, with the increase in prices, the purchasing power decreases , and money gradually depreciates. The accumulated financial assets of the population, in particular, bonds, term accounts, etc., are much lower than initially. People eventually become poorer, even keeping money at home.
3. The effect of import purchases - affects the value of exports. With the increase in prices, there is a growing demand for foreign goods and decreases to domestic ones.

But not only the cost of products and services depends on the costs of consumers. Non-price factors of aggregate demand are manifold. They are divided into groups according to which elements they affect.

1. Factors affecting the volume of consumption of products by households.

- Welfare of consumers - people spend their money depending on the value of assets that they possess (real estate, bonds, shares). So a sharp decline in the price of them leads to the fact that people begin to spend less and save more.

- Consumer expectations - depend on the forecasts of people. If they believe that in the near future there will be an increase in real income, then the aggregate demand for all goods grows. And, accordingly, on the contrary, the expectation of a crisis in the economy leads to the fact that people begin to accumulate savings.

- Indebtedness of buyers - if people have a large number of loans, installments on previous acquisitions, then aggregate demand is sharply reduced.

- Taxation - a reduction in the rate of income tax leads to the fact that people have more money to buy goods.

2. Non-price factors that cause changes in investment costs.

- Interest rates - when they increase, there is a reduction in investment costs. For example, consider a reduction in the volume of money supply. With the impact of this factor, the interest rate increases , deposits decrease.

- Expected return on investment - aggregate demand grows with optimistic forecasts.

- Taxes levied on enterprises - with their growth, the amounts that firms and their employees are willing to spend are reduced.

- Technology in production - any innovations contribute to the fact that the company is ready to invest more.

3. Factors associated with changes in government spending. If the government decides to purchase national products, it will increase the aggregate demand in the country.

4. Non-price factors that lead to changes in purchases of net exports.

- National income in foreign countries - with its increase there is the possibility that demand in this country will increase for export products.

- Exchange rates - affect the choice of consumers. People decide what goods to buy: imported or domestic.

Thus, the aggregate demand is constantly influenced by a large number of factors.