Question

What are the components of AD?

Answer 1

The components of AD are-

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

1. GOVERNMENT SPENDING (G)-

It refers to the money spent by the public sector on pensions, public infrastructure like roads, school etc.

The more the government spending, AD will shift right.

2. CONSUMPTION (C)-

It refers to the money spent by households for their own consumption.

The more the consumption, AD will shift right.

3. INVESTMENT (I)-

It refers to the investment made by firms on capital.

The more the investment, AD will shift right.

4. NET EXPORT=EXPORT-IMPORT=(X-M)-

Net export is the difference between export and import. It is affected by exchange rate and trade policy.

The more the net export, AD will shift right.

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