Aggregate demand is the total demand for final goods and services in the economy. It also refers to the total amount of money which all sectors are ready to spend on purchase of goods and services. Aggregate demand is the total expenditure on consumption and investment.
Components of AD are:
(i) Household (or private) consumption demand (C) : Value of goods and services that households are able and willing to buy.
(ii) Private Investment demand (I) : This refers to planned expenditure on buying of new capital assets like machines, buildings and raw material by private entrepreneur. This investment is done to increase production capacity in future.
(iii) Government demand for goods and services (G) : It is the government expenditure on purchase of consumer and capital goods to fulfill common needs of the society.
(iv) Net exports (exports-imports) demand (X−M) : Net exports is the difference between exports of goods and services and imports of goods and services during a given period. Net
exports show the demand of foreign countries for our goods and services over our demand for foreign countries goods and services. This strengthens the income, output and employment process of our economy.
AD=C+I+G+(X−M)