Economics AS Macroeconomics Notes

Aggregate Demand – The total demand for a country’s goods and services at a given price level and in a given time period. Aggregate Demand Formula: AD = Aggregate Demand C = Consumption / Consumer Expenditure I = Investment G = Government Expenditure X = Exports M = Imports Exports – Imports ≡ Net Trade ≡ Net Exports Consumption / Consumer Expenditure – Spending by households on consumer products – Consumption is the largest component of AD Investment – Spending on capital goods – Investment is the most volatile component of AD Government Expenditure – Spending by the central government and local government on goods and services – This is education, health care and the police service NOT including transfer payments (housing benefit, job seeker’s allowance and state pensions) / an increase in job seeker’s allowance would be reflected in consumption as the increase in benefits will create an increase in disposable income that would then be spent on goods and services. Transfer Payments – Money transferred from one person or group to another not in return for any good or service Job seeker’s allowance – A benefit paid by the government to those unemployed and trying to find a job Exports – Products sold abroad Imports – Products bought from abroad Trade Surplus – The value of exports exceeding the value of imports Trade Deficit - The value of imports exceeding the value of exports Real GDP - The country’s output measured in constant prices and so adjusted for inflation Gross Domestic Product (GDP) – The total output produced in a country AD = C + I + G + (X – M) 2 Created by K.Longe WII EU TIT (Consumption Determinants): W – Wealth – The more wealth people have (In the form of their home, savings account and shares), the more they are willing to spend  Increased Consumption. Ex. Wealth can be spent or used to borrow against. It also results in greater consumer confidence I – Income* – Main determinant on consumption. The larger the amount of income available the more disposable income available for use on spending.  Increased Consumption | The distribution of income is also a factor as the poor spend a larger proportion of income so govt. measures that redistribute income from the rich to the poor are likely to increase Consumption. I – Interest Rate – If interest rates fall, people get less return on their savings and can borrow money for less  Increased Consumption E – Expectations –If consumers are feeling optimistic about the future they are more likely to spend more  Increased Consumption. This is why an increase in income can lead to a higher proportion of income being spent as well, as higher income can increase consumer expectation / confidence. U – Unemployment – A decrease in unemployment means more people have more disposable income  Increased Consumption. T – Taxes – If taxes fall, disposable income rises  Increased Consumption I – Inflation – If inflation is high and people expect price to rise then they may spend more now  Increased Consumption | On the other hand if inflation is high people may instead increase their saving in order to maintain the real value of their saving. T – Technology – Nowadays consumers have a tendency to throw away the old and buy the latest stuff  Increased Consumption | E.g. New iPhone is released Wealth – A stock of assets E.g Property, shares and money held in a savings account Distribution of Income – How income is shared out between households in a country Inflation – A sustained rise in the general price level. Consumer Confidence – How optimistic consumers are about future economic prospects Interest Rate – The charge for b