IB Aggregate Demand
When we learnt about demand in micro economics we were talking about the sum of all the individual demands within a particular market or industry. Aggregate demand is the total demand in the entire economy (all the markets put together). Aggregate demand is made up of Consumption (C), Investment (I), Government spending (G) and net exports or Exports (X) minus imports (M). You must learn the AD identity: AD = C + I + G + (X - M)
We illustrate AD as follows
When you draw it you will draw the AD curve straight. You will notice that the axes are slightly different to micro economics and it is important that you do not confuse the two. Instead of Price we have Price Level and we use PL instead of P. Instead of Quantity we have Real GDP or Real National Output and we use Y instead of Q.
In the following lessons we will look at the individual components of AD starting with Consumption.
Consumption Lesson 1
You are now going to create a presentation on Consumption to give to the class in the next lesson. You will need to research online or look in books other than your text book. You must include the answers to these questions
- what is Consumption?
- Why is consumption so important in the UK (clue: % of AD)?
- How does spending differ for those on low incomes vs high incomes
- How is AD affected by
- changes in interest rates
- changes in confidence
- changes in household wealth
- changes in availability of credit
- What does an increase in Consumption do to the AD Curve (draw a diagram)
Presentation to be given in the second half of next week's lesson (I will randomly pick presenters)
This document may help you with your research
Investment Lesson 2
As we know AD = C + I + G + (X - M)
In this lesson we are going to learn about Investment (I) or Capital Investment
You are going to create a presentation on Capital Investment. You need to include the answers to the following questions:
- What is Investment?
- What are the different types of Investment?
- In the short run, what is the downside of investing in capital goods?
- Why is investment important for long term growth?
- What affect does Investment have on jobs/employment?
- What are the main factors that affect how much businesses are prepared to commit to investment projects?
- What does an increase in Investment do to the AD curve (draw a diagram)
Remember to include examples from any country you like
You will presenting at the end of next lesson so complete for homework if you need to
This document may help you with your research
The following lesson (20th October) we will have a test on AD (Consumption and Investment) so revise for homework (2 x 10 marks)
Government Spending Lesson 3
AD = C + I + G + (X-M)
G = Government Spending
Add a Government Spending section to your Aggregate Demand Presentation. You should make sure that you answer the following questions but feel free to add additional information: –
- What are the different reasons for government spending (how and why is money spent)?
- What area of spending is not included in G?
- What percentage of UK GDP is Government spending (how does it compare to other countries)?
- How does Government fund its spending?
- What are the main areas of government spending in theUK?
- Why is the UK government currently trying to reduce government spending?
- Does it matter if there is a budget deficit (government is spending more than it is earning)?
- How can we illustrate an increase of G using an AD diagram?
These documents will help you
Balance of Payments Lesson 4
AD = C + I + G + (X-M)
X = Exports
M = Imports
(X-M) = Balance of Payments
You are now going to add Balance of Payments (BoP) to your presentation. At this point you only need to understand the Current Account. You should make sure that you answer the following questions (you can look at an alternative to the UK if you wish) but feel free to add additional information:
- What are the main parts of the Current Account?
- What are the main UK exports?
- Who are the UK’s main trading partners?
- The UK has a high propensity to import. What does this mean?
- Does the UK have a BoP deficit or surplus and is this a problem?
- Which countries have a trade surplus and why?
- How does a change in exchange rate affect the BoP?
- Is a strong pound or weak pound (relative to its trading partner) good for the UK and why?
- What does an improvement in the BoP do to AD and how can you illustrate this?
This document will help you
