Chapter 5

Aggregate demand: the total demand for a country's goods and services at a given price level and in a given time period

AD = C + I + G + (X - M)

Price level: the average of each of the prices in all the products produced in an economy

Consumer expenditure: spending by households on consumer products

Investment: spending on capital goods 

Government spending:spending by the central government and local government on goods and services

Exports: products sold abroad

Imports: products bought from abroad

Net exports: the value of exports minus the value of imports

Government spending does not include transfer payments (job seeker's allowance/state pension) as these do not involve the government itself buying goods and services - this would be reflected in (higher/lower) consumer expenditure

Transfer payments: money transferred from one person or group to another not in return for any good or service

Trade surplus: the value of exports exceeding the value of imports

Trade decifit: the value of imports exceeding the value of exports 

Influences on consumer expenditure: 

• Real disposable income: Richer households/ecnomies tend to spend more in total than poorer ones. However, APC (the proportion of disposable income spent) may fall as disposable income rises, as income increases people can save more and still enjoy a high material living standard
• Wealth: a stock of assets e.g. property, shares and money held in a savings account. The more wealth people have the more they tend to spend. It also results in greater consumer confidence (how optimistic consumers are about future economic prospects) e.g. if house prices rise, consumers will feel more wealthy and are likely to spend more
• Consumer confidence and expectations: When consumers are feeling optimistic about the future they spend more 
• Rate of interest: the charge for borrowing money and the amount paid for lending money. A fall in interest rates will stimulate a rise in consumer expenditure as: it makes it cheaper for consumers to borrow in order to buy expensive items; reduces incentive to save because by spending now people are giving up less interest; those who are paying interest on a loan will have more money to spend

A04: net savers (people who save more than they borrow) will lose out 

• Age and structure of the population: generally considered that the young and elderly spend a relatively high proportion of their disposable income 
• Distribution of income: how income is shared out between households in a country. Government measures that redistribute income from rich to poor are likely to increase total consumer spending
• Inflation: a sustained rise in the price level. (linked to consumer expectations) if people expect inflation to rise rapidly in the future they may increase their spending now

Influences on saving

• • Real disposable income: as real disposable income increases households usually save more; and a higher proportion of their income - APS (the proportion of disposable income saved) rises 
  • Rate of interest: A rise in the rate of…