Formula to Calculate Aggregate Demand in the Economy
Aggregate demand formula refers to the formula that is used in order to calculate overall demand of all the goods and the services produced in the economy and according to the formula aggregate demand is calculated by adding consumer spending during the period, investment spending for the period, Government spending for the period and the exports during the period and then subtracting the Imports during the period from the resultant.
Aggregate demand is an important concept in macroeconomics as the focus of macroeconomics is on the demand and supply of all goods in the economy. The aggregate demand equals the demand for the Gross Domestic Product (GDP) of the country.
- C is consumption,
- I is an investment,
- G is government spending,
- X is exports,
- M is imports.
The difference between exports (X) and imports (M) is also referred to as net exports.
Step by Step Calculation of Aggregate Demand
In order to calculate the aggregate demand, the following steps are to be undertaken.
- Step 1: Calculate the total consumption expenditure, investment, government spending, and the value of exports and imports.
- Step 2: Use the formula, Aggregate Demand (AD) = C + I + G + (X – M)
Where C is consumption, I is an investment, G is government spending, X is exports and M is imports.
Note: Sometimes, net exports are given. When imports are reduced from exports, we get net exports.
Hence, Net Exports = X – M
Illustration of Aggregate Demand
The total consumption in an economy is $400 million. The total investment is $500 million and total government spending is $200 million. Since the economy is a closed one, there are no exports and imports.
Calculate the aggregate demand.
Using the above information we will calculate aggregate demand as follows,
Aggregate Demand will be –
Following are the figures available for an economy:
Calculate the aggregate demand.
All the information that is required for calculating aggregate demand is given in the problem.
So, the calculation will be-
An Economist is comparing the aggregate demand of two economies – Economy A and Economy B. He gets the following data:
Calculate the aggregate demand of the two economies. Also, find out which economy has a higher aggregate demand.
For Economy A
For Economy B
Similarly, we have calculated aggregate demand for economy B.
Aggregate demand for Economy A is $115 million and the aggregate demand of Economy B is $160 million.
Therefore, the aggregate demand for Economy B is higher.
The consumption in an economy is $45 million while the investment is $55 million. Government spending is $50 million. The exports are $25 million. The economy has a huge import bill of $75 million. Calculate the aggregate demand in the economy.
We need to find the aggregate demand. We first have to list the various components of aggregate demand in Excel.
Then, we will have to insert the aggregate demand formula in Excel.
=B4+B5+B6+(B7-B8) in cell B10.
Press enter and you will get the result.
Aggregate Demand Calculator
You can use the following aggregate demand calculator.
|Aggregate Demand (AD) Formula =||C + I + G + (X - M)|
|0 + 0 + 0 + (0 - 0) =||0|
Relevance and Use
Aggregate demand represents the overall strength of businesses and consumers in the economy. It has to be noted that aggregate demand is calculated at a particular price level. As a result of this, it may not truly indicate the standard of living in the economy.
This has been a guide to Aggregate Demand Formula. Here we discuss how to calculate aggregate demand using its formula along with the help of examples and downloadable excel template. You can learn more from the following articles –