9.1.2—AD components and determinants

Aggregate demand (AD) is total planned expenditure on domestically produced final goods and services: AD = C + I + G + (X − M). Consumption, investment, government spending and net exports are its components.

Each component has its own determinants: income and confidence affect consumption, interest rates and expectations affect investment, policy affects government spending, and foreign income, prices and exchange rates affect exports and imports.

If C=500, I=120, G=180, X=90 and M=110, AD is 780. Imports are subtracted because they are spending on foreign output.

AD is a flow of planned spending, not the same as GDP in every disequilibrium period, and imports are not added just because they are purchases.