Aggregate Demand: Components and the AD Curve

Aggregate Demand (AD) is the total planned expenditure on goods and services produced in an economy at a given price level over a given time period. It is one of the most important concepts in macroeconomics, forming one half of the AD/AS framework that dominates A-Level analysis. The concept was formalised by John Maynard Keynes (1936) in response to the Great Depression, when classical economics failed to explain persistent mass unemployment.

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The Components of Aggregate Demand

AD is the sum of four components:

AD = C + I + G + (X − M)

Component	Definition	Typical UK Share (approx.)
C — Consumption	Household spending on goods and services	~60% of GDP
I — Investment	Firms' spending on capital goods (machinery, buildings, technology)	~17% of GDP
G — Government Spending	Public sector expenditure on goods, services, and public investment	~20% of GDP
(X − M) — Net Trade	Exports minus imports — the trade balance	Typically negative for the UK (trade deficit)

Relative Importance