Macroeconomic analysis: aggregate demand and aggregate supply. Aggregate demand Aggregate demand in macroeconomics includes
In macroeconomics under aggregate demand refers to the total costs planned by all macroeconomic entities for the acquisition of all final goods and services created in national economy.
In accordance with the distribution of expenses between individual sectors of the economy as part of aggregate demand The following main elements are distinguished:
– household consumer expenditures (C);
– investment expenditures of the private sector (/);
– government procurement (b);
– net exports (NX).
As a result, aggregate demand as a whole can be represented as the amount of the specified expenses.
Most of the total demand constitute the population's expenditures on consumer goods and services, i.e. element C, often called for brevity consumption. The share of this indicator in the country’s national income reaches approximately 50% in Russia, and about 67% in the USA.
Investment spending refers to the demand of firms and households for investment goods. Firms buy these goods to increase the stock of real capital and restore worn-out capital. Purchasing houses and apartments is also part of the investment. The total investment amounts to about 15–20% of the country's GNP.
The third element of aggregate demand is government procurement of goods and services. It includes expenditures by government agencies at all levels to pay for services (for example, education, health care), purchase goods and pay wages government officials. Share public procurement in the total amount of expenses for the purchase of goods and services depends on the degree of government participation in the redistribution of the country’s national income, the level of tax rates and the size of the deficit state budget. In Russia, its value is about 30% of the country's national income.
Net exports represents the difference between exports (payments by foreigners for goods and services created in the country) and imports (expenses of economic entities of a given country to pay for goods and services produced abroad).
There are three other main effects that can influence change magnitude of aggregate demand:
– Effect interest rate. When the price level rises, the demand for money increases, and this is with a constant volume money supply in circulation causes an increase in interest rates, which in turn reduces incentives for investment and consumer spending. When interest rates are high, many consumers lose interest (or ability) in obtaining loans to purchase cars, furniture, real estate, and other goods;
– wealth effect is that an increase in the price level reduces the real value of many financial assets that bring fixed income (bonds, deposits). Feeling poorer due to the depreciation of savings, consumers begin to save on purchases;
– effect of import purchases. An increase in the general price level in one country will encourage more goods to be imported into that country, and the value of exports will decrease. As a result, there will be a reduction in net exports, and therefore in the total amount of aggregate demand.
The need for a general model. Consequences of forced liberalization economic activity in Russia affected the state of aggregate demand and supply: liberalization of prices and elimination of shortages of consumer goods (including through imports) led to redistribution Money population in favor of current consumption at the expense of previously accumulated savings.
Structural restructuring of the economy in the process of liberalization of economic life, associated, in particular, with changes in the structure of demand and relative prices, in a certain way influenced the state of aggregate supply. For example, due to the mismatch in the structure of production factors employed in different industries, it was impossible to completely redistribute them in accordance with new needs from declining industries to promising ones. In this regard, not all of the production potential involved in the pre-perestroika period could be used after economic liberalization. Factors such as the severance of a number of production ties and the reduction of trade relations with the former Soviet republics and CMEA partners also acted to reduce the volume of potential output (long-term aggregate supply). The phenomenon of “hysteresis”—the loss of some production potential, due to the fact that the decline in production turned out to be quite stable and long-term. Model AD-AS(with a certain degree of conditionality) can be used to interpret and analyze the processes occurring in the transition economies of Russia and other countries.
The long-term depressed state of the economy led to a decrease in real incomes of the bulk of the population, which caused a subsequent fall in aggregate demand. The decline in investment activity in the economy also had an effect in the same direction, which reduced the investment component of aggregate demand. Graphically this is illustrated by the left shift of the curve A.D. which further intensifies the decline, at least in short term, although it slightly reduces the price level or slows down inflation (if prices are inelastic downward) [1].
So the model AD-AS can be used both to illustrate and to assess the prospects for events in transition economies in all cases when aggregate supply and demand begin to work in accordance with the laws of the emerging market mechanism.
Aggregation- consolidation economic indicators by combining them into a single group. Aggregated indicators represent generalized, synthetic measures that combine in one overall indicator many are private. So, for example, the volume indicator industrial production in a country represents the total value of production volumes of all industrial enterprises. Aggregation is carried out through summation, grouping or other methods of reducing particular indicators into generalized ones. The basis of the macroeconomics method is aggregation, which means the combination of similar economic entities and objects into the largest possible groups. For example, during aggregation, all consumers are combined into the household sector. Aggregation of objects economic relations leads to the fact that all individual goods and means of production are transformed into a single good, acting both as an object of consumption and as a means of production.
Aggregation markets is carried out with the aim of identifying the patterns of functioning of each of them, namely: studying the peculiarities of the formation of supply and demand and the conditions of their equilibrium in each of the markets; determining the equilibrium price and equilibrium volume based on the relationship between supply and demand; analysis of the consequences of changes in equilibrium in each of the markets.
Market aggregation makes it possible to identify four macroeconomic markets:
- 1) market for goods and services (real market);
- 2) financial market(financial assets market);
- 3) market of economic resources;
- 4) foreign exchange market.
To obtain an aggregated market of goods and services (goods market) we must abstract from the entire variety of goods produced by the economy and highlight the most important patterns of the functioning of this market, i.e. patterns of formation of demand and supply of goods and services. The relationship between supply and demand allows us to obtain the equilibrium price level (price level) for goods and services and the equilibrium volume of their production (output). The market for goods and services is also called real market (real market), because they buy and sell there real assets(real values - real assets). Aggregation, in addition to combining subjects and objects into large groups, also means summing up their characteristics. For example, summing the value of all goods produced in an economy gives the gross product.
The advantage of aggregation is the maximum simplification of the object, which allows you to detect and analyze those of its properties that cannot be noticed when large quantities elements in the analyzed system.
The basis macroeconomic equilibrium constitutes a correspondence between supply and demand on the scale of the entire economy, i.e. aggregate demand and aggregate supply.
For the first time, the problem of macroeconomic equilibrium was taken up by one of the classics economic theory– Swiss economist Leon Walras (1834-1910).
Aggregate demand is a model showing different volumes of goods and services, i.e. the real volume of national production that consumers (households), enterprises (firms) and the government (state) are willing to buy at any possible level prices
In economic theory, under aggregate demand (AD, aggregate demand) refers to the total costs planned by all macroeconomic entities for the acquisition of all final goods and services created in the national economy.
In other words, aggregate demand (AD) it is the total expenditures of macroeconomic entities on final goods and services produced in the economy during a certain period of time.
In accordance with the distribution of expenses between individual sectors of the economy, the following main elements are distinguished as part of aggregate demand:
a) household consumption expenditures (C);
b) investment expenditures of the private sector (I);
c) public procurement (G);
d) net exports (X n).
Thus, aggregate demand as a whole can be expressed as the sum of the specified elements of expenditure:
AD = C + I + G + X n.
Therefore, in the structure of aggregate demand we can distinguish:
a) demand for consumer goods and services;
b) demand for investment goods;
c) demand for goods and services from the state;
d) demand for a given country's exports from foreigners (or demand for net exports).
Thus, demand in macroeconomics acts not as the demand of individual buyers or groups of the population, but as aggregate effective demand on the scale of the entire national economy. This is everyone's demand households for consumer goods and services, all firms for investment goods and services, total states for the goods and services it purchases, as well as all demand from abroad for goods, services and economic factors of a given country.
Aggregate demand is influenced by price and non-price factors. The most important determinant of AD is price.
Aggregate demand curve (AD) shows the number of goods and services that will be purchased at each this level prices This dependence is graphically presented in the form of an aggregate demand curve (Fig. 1).
A change in the volume of aggregate demand is expressed in movement along the AD curve. According to the quantity theory of money: MV = PY. Hence Y d = MV/P, where P is the price level in the economy; Y d – real amount of income; M is the amount of money in the economy; V – velocity of money circulation.
Figure 1 – Aggregate demand curve
Thus, in economic theory, the law of decreasing dependence of the magnitude of aggregate demand on the price level is theoretically justified. This law is based on the characteristics of three effects in the economy caused by changes in the general price level:
· Keynes effect(interest rate effect) means – R, =>M/R↓, =>i, =>I↓, =>AD↓;
· Pigou effect(real cash balance effect, or wealth effect) means - R, =>M/R↓, =>С↓ => AD↓;
· effect of import purchases means – R, =>E↓, =>NE↓, =>AD↓.
In addition to the above price factors, aggregate demand is influenced by non-price factors, which cause a change in the nature of AD and lead to a shift in the AD curve, i.e. everything that influences:
a) on household consumer spending (consumer welfare, their expectations, changes in income tax);
b) on investment expenses of firms (interest rates, subsidies, preferential loans to investors, business taxes);
c) on government spending (public policy);
d) for net exports (fluctuations exchange rates, conditions on foreign markets, etc.).
It is important to remember two more non-price factors of aggregate demand: the supply of money (M) and the velocity of money (V).
Aggregate supply is a model that shows the level of available real output at each possible price level.
Aggregate supply ( AS, aggregate supply) is the sum of all final goods and services produced in a country that firms are willing to offer on the market during a certain period at each possible price level. In other words, aggregate supply is the real volume of national production at various values of the price index for final goods and services. This concept is often used synonymously with GDP.
Aggregate demand can be represented as national income used, and aggregate supply as national income produced.
The aggregate supply curve AS shows what volume of aggregate output can be offered to the market by producers at different values of the general price level in the economy.
The nature of the AS curve is influenced by:
a) price factors;
b) non-price factors.
Price factors change the volume of aggregate supply (movement along the AS curve). Non-price factors (changes in technology, resource prices, volume of resources used, taxation of firms, market structure, etc.) lead to a shift in the AS curve.
The shape of the AS curve is interpreted differently in the classical and Keynesian schools. Thus, changes in the value of aggregate supply under the influence of the same factor may be different, depending on what period (short-term or long-term) is taken into account.
Modern concepts explain the difference between the short-term AS curve and the long-term curve by market imperfection, i.e. inflexibility of prices and imperfect information. Both classical and Keynesian concepts describe reproductive situations that are quite possible in reality. Therefore, it is customary to combine the three forms of the aggregate supply curve into one line, which has three sections: horizontal (Keynesian, I), intermediate (ascending, II), vertical (classical, III) - Fig. 4.
Macroeconomics, as is known, uses aggregate indicators. Unlike individual demand aggregate demand represents the sum of all expenses of macroeconomic entities for the acquisition of final goods and services created in the national economy.
As we saw earlier, there are two counter flows in the national economic circulation model: material and monetary. Therefore, in the structure of aggregate demand, it is possible to distinguish natural-material and cost forms of aggregate demand.
Natural form aggregate demand reflects the social need of all macroeconomic entities for goods and services. Therefore, the structure of aggregate demand includes goods and services of non-productive consumption that satisfy personal and other non-productive needs, as well as the totality of all investment goods and production services.
From point of view value form Aggregate demand reflects the relationship between the volume of total output of the social product that all sectors of the economy are willing and able to purchase and the general price level. In other words, it is the demand of households, firms, the state, and the foreign sector for the total volume of final goods and services created in the national economy, which can be supplied at each price level.
The largest part of aggregate demand consists of household expenditures on the purchase of consumer goods and services, which are otherwise called consumer expenditures, or simply real consumption, and are denoted as WITH.
A more dynamic component of aggregate demand, changes in which cause fluctuations in business activity, are investment costs, i.e., the demand of entrepreneurs for investment goods to restore worn-out and increase real capital, as well as the demand of households for housing construction, denoted as I.
The third element of aggregate demand is demand from public sector – public procurement of goods and services. It must be remembered that they do not include transfer payments to the population, as well as subsidies and subventions to the business sector, since these costs are associated with the process of redistribution of funds, and not with the costs of creating gross output. This component is designated, as is known, - G.
One more integral part aggregate demand is demand from the foreign sector, more precisely - net exports – Xn– the difference between the demand of foreign agents for domestic products and the demand of domestic economic entities for foreign goods and services, i.e. export minus import.
Thus, aggregate demand as a whole can be represented as the sum of the above-mentioned elements of expenditure, which is nothing more than the value of the gross national product calculated by the expenditure method. This means that aggregate demand AD(from the English aggregate demand) is equal to Y(GNP):
AD = Y (GNP) = C + I + G + X n.
From the definition of aggregate demand, it is clear that there is a certain relationship between the volume of gross output of goods produced and the general price level. This dependence reflects the action of law of aggregate demand. The essence of this law is that consumers (all sectors of the economy), other things being equal, will purchase a larger volume of national product the lower the general price level, and vice versa. Those. between the real volume of gross internal product and the price level there is an inverse relationship, which can be reflected graphically in the form aggregate demand curve AD (Fig. 4.2).
This aggregate demand curve AD shows the quantity of final goods and services that consumers are willing to purchase at each possible price level. Moreover, it is necessary to take into account that this model of aggregate demand is valid provided that the amount of money remains constant and is based on the equation of the quantity theory of money - Fisher’s formula:
M ∙ V = P ∙ Q
Based on this equation: Q = AD = . Hence, AD is directly dependent on the money supply and the velocity of money circulation and inversely dependent on the price level. If the money supply ( M V) unchanged, then the volume of national production ( Q) should decrease as the price level rises ( P). Therefore, the aggregate demand curve looks like a downward sloping curve.
Negative slope AD is also explained by the action of three effects:
1) interest rate effect, i.e. prices for the use of money. The fact is that an increase in the price level increases the demand for money, since more and more of it is required to carry out transactions. This, in turn, leads to an increase in the fee for using borrowed money - the interest rate. Therefore, households are postponing purchases and entrepreneurs are reducing investments. As a result, at higher prices, aggregate demand for goods and services decreases;
2) wealth effect or cash balance effect: rising prices reduce the real purchasing power of accumulated financial resources with a fixed cost (bonds, bank deposits, fixed-term accounts), which makes their owners relatively poorer and forces them to reduce expenses;
3) effect of import purchases: an increase in prices within the country leads to a decrease in the value of exports and an increase in imports, which entails a decrease in aggregate demand.
The above factors are called price factors and mean a change in the amount of aggregate demand, i.e. movement along a constant curve A.D.
However, in addition to price factors, the volume of demand for goods and services is also influenced by non-price factors, the action of which ultimately leads to a change in the money supply and the velocity of money, which is graphically reflected in the shift of the curve AD to the right if aggregate demand increases, and to the left if it decreases (Figure 4.3). Basically these are all factors affecting the constituent elements AD. These include:
1) changes in consumer spending, which in turn depend on:
Dynamics of consumer welfare. Fluctuations in property values lead to changes in decisions about purchasing goods and services. For example, a sharp increase in the exchange rate valuable papers owned by households will cause an increase in consumer spending, and, therefore, lead to an increase in aggregate demand;
Dynamics of consumer debt. After all, in order to pay off increased debts, it is necessary to reduce current consumption, and, consequently, reduce AD;
Dynamics of taxes on consumer income, because the higher the rate income tax, the less net income, which means consumer spending and AD generally;
Consumer expectations, especially in a very high level inflation;
2) changes in investment spending, which are influenced by:
Interest rate dynamics not related to price changes (for example, due to changes in the money supply). An increase in the interest rate leads to an increase in the price of loans, and this, given a constant price level and the inability to increase profits due to rising prices, will inevitably lead to a reduction AD;
Expected returns on investment. If making a profit is problematic, then investment costs are reduced, reducing and AD;
Presence of redundant production capacity, which is a factor in slowing down investment;
Technology development. The emergence of new technologies forces entrepreneurs to increase investment spending;
Dynamics of taxes on entrepreneurs’ income and implementation tax benefits regarding investments. An increase in the tax rate reduces the profits of firms, reducing incentives to invest; the introduction of tax breaks on investment, on the contrary, increases AD;
3) changes in government procurement volumes also have a direct impact on the position of the aggregate demand curve;
4) changes in net exports because of:
Price fluctuations in the markets of other countries,
Dynamics of national income in foreign countries,
Exchange rate fluctuations;
5) changes in the money supply. An increase in the money supply in the country in the short term leads to a decrease in interest rates, improved lending conditions, and, consequently, an increase in investment and growth AD.
Thus, there are a huge number of factors influencing the volume of real gross domestic product that macroeconomic entities are willing and able to purchase at a given price level.
