Aggregate Demand: Definition, Factors and Components

Aggregate demand or what is called aggregate is an important measurement for tracking customer demand for final goods and services from an economy. This calculation will help show how the elements of the economy, for example, such as the wealth of the population, business loans that influence each other in one aspect and another.

If Sinaumed’s runs a business or has to make financial decisions, then understanding aggregate demand will help Sinaumed’s in analyzing the current state of the economy. To understand more about aggregate demand, read this article to the end!

Definition of Aggregate Demand

Aggregate demand is a term commonly used in macroeconomics. Aggregate demand is the demand for total final goods and services at a certain price level and in a certain period.

When viewed over a long or long term, this aggregate demand will equal gross domestic product or GDP, due to the fact that these two metrics are calculated through the same process.

Gross domestic product can show the value of the total services and goods produced by a country in one year. Meanwhile, aggregate demand is the demand for goods and services that have been produced.

Since these metrics are calculated in the same way, they both increase and decrease at the same time. Although this aggregate demand will actually only be the same as GDP in the long run, if the price level is adjusted.

This adjustment is necessary, because short-term aggregate demand is a measurement of total output at a certain price level, before inflation is taken into account. The account for aggregate demand for all finished goods includes exports, imports, government spending programs and capital goods.

Then, why is aggregate demand important? Aggregate demand is arguably important because it can help professionals measure and assess the general state of a country’s economic condition.

This can help as well as show how a country moved from a slowdown to a true recession or how the country can get out of a recession.

Aggregate demand is also important because it can serve to measure the effect of prices on productivity. Economists, however, will link aggregate demand with gross domestic product, because both are calculated in the same way.

GDP is the sum of all goods produced in an economy, while aggregate demand is both the demand and the desire for these goods.

That way, aggregate demand and GDP rise and fall simultaneously. When consumers want a product with more quantity, the company will certainly produce more to meet this consumer demand.

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For example, when smartphone technology changes, customers tend to want the latest version, so the demand for smartphones will increase. The company will then produce more smartphones to meet consumer demand.

When production increases, the company will hire more employees to make the product. This can certainly help improve the overall state of the economy.

Factors Affecting Aggregate Demand

In the world of economics, there are several factors that affect aggregate demand, along with an explanation.

1. Changes in the Nunga Tribe

Rise or fall in the value of interest rates, is able to influence the decisions made by every consumer and business. Lowering interest rates will certainly have an impact on reducing borrowing costs for valuables, for example vehicles, household needs and homes.

When interest rates are low, companies can apply for loans at lower interest rates. As a result, there will be an increase in capital spending.

And vice versa, when interest rates increase, the cost of borrowing for individuals and companies will also increase. Under these conditions, expenses that occur will tend to slow down or decrease. The increase in price will be greatly influenced by the large amount of expenditure.

2. Income Level and Community Welfare

When national income is increasing, the income of each household will also increase. At times like these, aggregate demand will also increase.

Vice versa, when income decreases, it will also have an impact on decreasing aggregate demand. When a country enters a recession, this condition will also have an impact on aggregate demand.

If the people of a country feel that their country’s economic conditions are in a safe condition, then these people tend to spend more and this will have an impact on decreasing savings.

However, when a recession occurs, people will tend to try to increase their savings and not spend much.

3. Changes in inflation expectations

If a country is experiencing an increase in the rate of inflation, then in general there will also be an increase in the prices of goods and services in that country.

If people feel that their country is experiencing inflation, then these people will make purchases before commodity prices become high or increase.

Such conditions will cause aggregate demand to increase. And vice versa, if people feel that commodity prices will soon decrease in the near future, then people will tend to wait until commodity prices fall. This kind of thing, will make aggregate demand will also decrease.

4. Changes in Currency Exchange Rates

Currency values ​​will also have a large impact on aggregate demand. If the value of a country’s currency is declining or even dropping, then the price of goods in that country will of course be more expensive, especially imported goods.

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And vice versa, if the country’s currency is strengthening or its value is increasing, the price of imported goods will be cheaper. Rise and fall in the value of this currency, will affect the value of aggregate demand.

In addition to these four factors, economic conditions that occur on a national or international scale will certainly have an impact on the value of aggregate demand in certain countries.

In a recession, for example, every consumer and producer will certainly tend to reduce their spending. Therefore, the number of credit applications will also be reduced.

This will certainly have an impact on production spending and investment instruments. There will be many business people who experience losses, due to many factors, whether it’s due to a lack of capital or because sales have dropped dramatically.

Therefore, companies must be forced to reduce the number of employees by way of layoffs or other means. However, in effect, there will be many members of society who become unemployed. For this reason, economic conditions in a country will greatly impact aggregate demand.

Another factor is debt. Debt has a very important role in the high or low value of aggregate demand. Basically, aggregate demand is issuing currency for the purpose of investment, consumption and others.

Spending that amount of money will depend heavily on the amount of income earned. Here’s a brief overview:

Income – expenses: the amount of savings.

Expenditure : income – savings : income + debt.

In other words, the amount issued by someone can be added to the amount borrowed. So, if someone spends Rp. 5 million, while his income is Rp. 4 million, then that person will definitely borrow the amount of money he needs or Rp. 1 million.

That’s when someone turns out to have an income of IDR 4 million and can only spend IDR 3 million, then that person must still have IDR 1 million in savings.

If a lot of people apply for loans, it means that the level of public confidence in the financial condition of a country at that time is good. This is because the value of aggregate demand also increases.

However, if the condition of a country’s economy is declining, consumers will also tend to refrain from buying products or services at high prices and avoid credit. So, the value of aggregate demand will also decrease.