Aggregate Demand, Consumption and Saving

Lesson

Part 1 — planned and realised values, effective demand, and the components of aggregate demand and aggregate supply.

In this lesson you will

Distinguish ex ante (planned) from ex post (realised) values and explain why realised saving equals realised investment
Explain the meaning of effective demand
List the components of aggregate demand and calculate it; express aggregate supply as consumption plus saving

Part 1 at a glance

Concept

Aggregate demand and its four parts

Aggregate demand is the total planned spending on final goods and services in an economy during a period.

Table of the four components of aggregate demand: private consumption by households, investment by firms, government expenditure, and net exports (exports minus imports), each with an imagined Indian example
Component	Who spends	Imagined example
C — private consumption	Households	A Jaipur family buys a mixer-grinder
I — investment	Firms	A Pune factory installs a new press and adds to its stock
G — government expenditure	Government	A state buys ambulances for district hospitals
X − M — net exports	Buyers abroad, less spending on foreign goods	Prawns sold to a hotel abroad, minus imported phones

Concept

In an open economy with a government: AD = C + I + G + (X − M). In a simple two-sector economy: AD = C + I.

Adding up planned spending