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Analysing the macro economy
AGGREGATE DEMAND (AD) The total of all the demand in an economy, from consumers,
investment, government expenditure and the balance between exports and imports. (C + I + G + X M)
Consumption: Household spending on goods and services: largest component of AD. A lot of factors affect the amount of consumption:
Household incomes (although borrowing and saving mean that there is not a precise match between incomes and spending), interest rates
affect the amount of borrowing and saving and consumer confidence also has an impact.
Investment: Spending on capital goods which increases future productive capacity. Businesses may link investment to the prospect of profits.
Confidence and expectations influence investment as do interest rates (which show the cost of borrowing to finance investment)
Government Spending: Governments can spend directly e.g. on hospitals or weapons, or indirectly e.g. pensions. The amount raised by
taxation influences government spending. If the government wants to increase AD they could just simply increase government spending.
The balance of trade: Exports are added to AD as it reflects the UK's economic activity not spending; the level of spending in other countries
and the exchange rate influences the level of exports. Buying imports is part of the UK spending so is subtracted from AD.
The AD curve:
AGGREGATE SUPPLY (AS)
This measures the contributions to total output from all activities in the economy against the general price level.
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tended to decline whilst new products and technologies have found new and growing markets.
Knowledge economy: the situation in which intellectual skills, command of knowledge, understanding and ideas have all become
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