Aggregate demand (AD) is the total demand for goods and services produced in the economy over a period of time. Aggregate planned expenditure for goods and services in the economy = C + I + G + (X-M).
C - Consumers' expenditure on goods and services: This includes demand for durables & non-durable goods. I - Gross Domestic Fixed Capital Formation - i.e. investment spending by companies on capital goods. Investment also includes spending on working capital such as stocks of finished goods and work in progress. G - General Government Final Consumption. i.e. Government spending on publicly provided goods and services including public and merit goods. Transfer payments in the form of social security benefits (pensions, job-seekers allowance etc.) are not included as they are not a payment to a factor of production for output produced. A substantial increase in government spending would be classified as an expansionary fiscal policy. X- Exports of goods and services. M - Imports of goods and services. Imports are a withdrawal (leakage) from the circular flow of income and spending in the economy. Goods and services come into the economy - but there is a flow of money out of the economic system. Therefore spending on imports is subtracted from the aggregate demand equation. Note: X-M is the current account of the balance of payments.
