- This topic has 3 replies, 3 voices, and was last updated 3 years ago by
.
- Posts
Hello sir,
As I understand it, AD is the total demand for goods already produced in an economy, but AD = C+I+G+X-M. In which, take X minus M (demand for imported goods) (If it were me, I would take M minus X). May you explain to me why aggregate demand takes exports minus imports?
Thank you.Think of AD as the total demand for goods and services satisfied by expenditure within our economy. It is the same as GDP.
C, I and G are easy, but C is the total consumption expenditure asand I is the total investment expenditure. If some of these expenditures go on imported goods then that does not add to our economy: it’s like a leakage Therefore there has to be a -M to adjust for how much of our money goes abroad.
Similarly, if a foreign person or company buys our goods (is ewe export) we have to add that demand as C only counts expenditures by people in our country.
A very extreme example would be where the only economic effect was that the population bought imported food. Lets say $100m was spent on that, but if it all went to pay for imports the implication is that the home economy is of no size whatsoever and GDP and AD would be zero.
Hi Ken,
One question popped up when reading your “extreme” example about imported food
Wouldn’t be the GDP = -$100m in that case (with minus sign)?
GDP = C (0) +I (0) +G (0) +X (0) -M ($100m)If people paid for imports themselves and thatmwas the only economic activity then the mkney spent on imports would all go abroad the economy must shrink.
I honestly don’t know if AD is technically allowed to be negative or if it goes to zero then another effect takes over.
- You must be logged in to reply to this topic.