# What Is Aggregate Demand?

> **Definition**
>
> Aggregate demand is the total dollar value of spending on finished goods and services within an economy during a set time period.

## What Is Aggregate Demand?

Aggregate demand is the sum total of all spending for finished goods and services in an economy. The total for aggregate demand includes the value of all consumer goods, [capital goods](https://www.investopedia.com/terms/c/capitalgoods.asp), exports, imports, and government spending programs.

While gross domestic product (GDP) measures the goods and services produced, aggregate demand measures overall spending on goods and services.

### Key Takeaways

*   Aggregate demand measures the dollar value of all finished goods and services acquired within an economy during a specific time period.
*   GDP, in contrast, measures the dollar value of all goods and services produced.
*   Historically, these two measurements rise or fall in sync.

![Aggregate Demand](https://www.investopedia.com/thmb/hx8mbF6-Kdt-_qtKmluarOdf4zc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/aggregatedemand-d285739b41d34e58a3ef9dd827bdd49b.jpg)

*Aggregate demand is the sum of four components: consumption, investment, government spending, and net exports. — Investopedia / Ellen Lindner*

## GDP and Aggregate Demand

Aggregate demand is a macroeconomic term and can be compared with the [gross domestic product (GDP)](https://www.investopedia.com/ask/answers/033015/what-formula-calculating-gross-national-product-gdp.asp). GDP represents the total amount of goods and services _produced_ in an economy, while aggregate demand is _the demand or desire_ for those goods.

The total demand for consumer goods, capital goods, exports, imports, and government spending programs is determined by the overall collective spending on products and services by all economic sectors.

Aggregate demand and GDP commonly increase or decrease together. Aggregate demand equals GDP in the long run only after adjusting for the [price level](https://www.investopedia.com/terms/p/price_level.asp). Short-run aggregate demand measures total output for a single nominal price level without adjusting for [inflation](https://www.investopedia.com/terms/i/inflation.asp).

> **Important**
>
> Aggregate demand is measured by market values and only represents total output at a given price level, and does not necessarily represent the quality of life or standard of living in a society.

## Aggregate Demand Components

*   **Consumer Spending**: The demand by individuals and households within the economy.
*   **Investment Spending**: Business investment to support current output and increase production capability. It may include spending on new capital assets such as equipment, facilities, and raw materials.  
    
*   **Government Spending**: The demand of government entities, such as [infrastructure](https://www.investopedia.com/terms/i/infrastructure.asp) spending and public goods. This does not include services such as Medicare or social security, because these programs simply transfer demand from one group to another.
*   **Net Exports**: The demand for foreign goods, as well as the foreign demand for domestic goods. It is calculated by subtracting the total value of a country's exports from the total value of all imports.

## Formula

The equation for aggregate demand adds the amount of consumer spending, investment spending, government spending, and the net of exports and imports. The formula is shown as follows:

$\begin{aligned}&\text{Aggregate Demand}=\mathrm{C+I+G+Nx}\\&\textbf{where:}\\&\mathrm{C}=\text{Consumer spending on goods and services}\\&\mathrm{I}=\text{Private investment and corporate spending on}\\&\quad\text{ \,\,\,non-final capital goods (factories, equipment, etc.)}\\&\mathrm{G}=\text{Government spending on public goods and social}\\&\qquad\text{\,services (infrastructure, etc.)}\\&\mathrm{Nx}=\text{Net exports (exports minus imports)}\end{aligned}$

The aggregate demand formula is also used by the U.S. Bureau of Economic Analysis to measure GDP in the U.S.

## Graphing Demand

Like most typical [demand curves](https://www.investopedia.com/terms/d/demand-curve.asp), the aggregate demand curve slopes downward from left to right, with goods and services on the horizontal X-axis and the overall price level of the basket of goods and services on the vertical Y-axis. Demand increases or decreases along the curve as prices for goods and services either increase or decrease.  

![A graphical representation of the aggregate demand curve.](https://www.investopedia.com/thmb/NiUj7Qb84H5CY5XDTrzkVCuNj2I=/640x0/filters:no_upscale():max_bytes(150000):strip_icc()/Aggregate-Demand-Slope-56a27deb5f9b58b7d0cb45c6.png)

**

## What Affects Demand?

*   **Interest Rates**: Lower [interest rates](https://www.investopedia.com/terms/i/interestrate.asp) will lower the borrowing costs for big-ticket items such as appliances, vehicles, and homes, and companies will be able to borrow at lower rates, often leading to capital spending increases. Higher interest rates increase the cost of borrowing for consumers and companies, and spending tends to decline or grow at a slower pace.
*   **Income**: As household wealth increases, aggregate demand typically increases. Conversely, a decline in household wealth usually leads to lower aggregate demand. When consumers feel good about the economy, they tend to spend more and save less.  
    
*   **Inflation Expectations**: Consumers who anticipate inflation will increase or prices will rise tend to make immediate purchases, leading to rises in aggregate demand. But if consumers believe prices will fall in the future, aggregate demand typically falls.  
    
*   **Currency Exchange Rates**: When the value of the U.S. dollar falls, foreign goods become more expensive. Meanwhile, goods manufactured in the U.S. become cheaper for foreign markets. Aggregate demand will, therefore, increase. When the value of the dollar increases, foreign goods are cheaper and U.S. goods become more expensive to foreign markets, and aggregate demand decreases.

## Supply vs. Demand

The 18th-century French classical liberal economist [Jean-Baptiste Say](https://www.investopedia.com/terms/j/jean-baptiste-say.asp) stated that consumption is limited to productive capacity and that social demands are essentially limitless, a theory referred to as [Say's Law of Markets](https://www.investopedia.com/terms/s/says-law.asp). The [Austrian School](https://www.investopedia.com/terms/a/austrian_school.asp) [](https://www.investopedia.com/articles/economics/09/austrian-school-of-economics.asp)and real business cycle theorists stress that consumption is only possible after production. This means an increase in output drives an increase in consumption, not the other way around.

Say's law, the basis of [supply-side economics](https://www.investopedia.com/articles/05/011805.asp), ruled until the 1930s and the advent of the theories of British economist [John Maynard Keynes](https://www.investopedia.com/terms/j/john_maynard_keynes.asp). Keynes argued that demand drives supply, and stimulating aggregate demand increases output. Keynes considered unemployment a byproduct of insufficient aggregate demand because wage levels would not adjust downward fast enough to compensate for reduced spending. He encouraged government spending to increase aggregate demand until idle economic resources, including laborers, were redeployed.

As a [demand-side economist](https://www.investopedia.com/ask/answers/040915/what-demandside-economics.asp), Keynes further argued that individuals could end up damaging production by hoarding money. Other economists argue that hoarding can impact prices but does not necessarily change capital accumulation, production, or future output. In other words, the effect of an individual's saving money—more capital available for business—does not disappear due to a lack of spending.

## How Do Economists Analyze Aggregate Demand and GDP?

During an economic crisis, economists often debate whether aggregate demand slowed, _leading to lower growth,_ or GDP contracted, _leading to less aggregate demand_. Boosting aggregate demand also boosts the size of the economy in terms of measured GDP. However, this does not prove that an increase in aggregate demand creates economic growth. Since GDP and aggregate demand share the same calculation, it only indicates that they increase concurrently. The equation does not show which is the cause and which is the effect.

## What Are Examples of Economic Crises That Affected Aggregate Demand?

The [financial crisis of 2007-08](https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp), sparked by massive amounts of mortgage loan defaults, and the ensuing [Great Recession](https://www.investopedia.com/terms/g/great-recession.asp), offer a good example of a decline in aggregate demand due to economic conditions. In 2020, the [COVID-19 pandemic](https://www.investopedia.com/how-shopping-habits-changed-due-to-covid-5186278) caused reductions in both aggregate supply and production, and aggregate demand or spending. As aggregate demand fell, businesses either laid off part of their workforces or otherwise slowed production.

## What Affects Consumer Spending?

A poor-performing economy and rising unemployment commonly lead to a decline in personal consumption or consumer spending.

## The Bottom Line

Aggregate demand is a concept of macroeconomics that represents the total demand within an economy for all kinds of goods and services at a certain price point. In the long term, aggregate demand is indistinguishable from GDP.  

> **Article Sources**
>
> 1.  Bureau of Economic Analysis. "[What is GDP?](https://www.bea.gov/sites/default/files/2018-04/GDP-Education-by-BEA.pdf)," Page 2.
>     
> 2.  Mises Institute. "[Say's Law of Markets](https://mises.org/mises-daily/says-law-markets)."
>     
> 3.  International Monetary Fund. "[What Is Keynesian Economics?](https://www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm)"
>     
> 4.  Congressional Research Service. "[U.S. Economic Recovery In the Wake of COVID-19: Successes and Challenges](https://crsreports.congress.gov/product/pdf/R/R47115)," Page 5.