Aggregate Demand l1

Aggregate Demand
AS Economics Unit 2
Aims and Objectives

Aim: To understand aggregate demand Objectives: Define aggregate demand Explain the components of aggregate demand Analyse weighting of the components of aggregate demand Evaluate policies aimed at increasing aggregate demand
2012 Q4 Economy Shrinks
Breaking news Mr Young was right again! Triple dip?
Why?
Manufacturing Service Sector Construction 1.5% 0% 0.3%
2012 Q4 Economy Shrinks
Disruption to North Sea Oil and Gas Extraction maintenance etc
Aggregate Demands Components

GDP = C + I + G + (X-M)
C = Consumption I = Investment G = Government Spending X = Exports M = Imports
Importance of Consumption
Consumer Spending Closely Linked to Yd
Aggregate Demand Curve

Price Level
AD 0
Real Output
Contraction in AD
Price Level
Caused by falling: C, I, G, X Increasing M
AD AD1 0
Real Output
Expansion in AD
Price Level
Caused by Increasing: C, I, G, X Falling M
AD 0
AD1
Real Output
Consumer Confidence & AD

Aggregate Demand increasing is reliant on consumer confidence. Particularly the UK Economy! UK consumer confidence stems from house prices!
House Price Inflation % 10 20 30 40 0 -30 1984 Q1 1984 Q4 1985 Q3 1986 Q2 1987 Q1 1987 Q4 1988 Q3 1989 Q2 1990 Q1 1990 Q4 1991 Q3 1992 Q2 1993 Q1 1993 Q4 1994 Q3 1995 Q2 1996 Q1 Date Growth in consumption -6 -4 -2 1996 Q4 1997 Q3 1998 Q2 1999 Q1 1999 Q4 2000 Q3 2001 Q2 2002 Q1 2002 Q4 2003 Q3 2004 Q2 2005 Q1 2005 Q4 2006 Q3 2007 Q2 2008 Q1 2008 Q4 2009 Q3 0 2 4 6 8 10 Consumption Growth % House price inflation -20 -10
UK Consumption & House Prices

UK House Price Inflation and Consumption Growth
Source: M Young (2010) UK Household Sector Spending: the Significance of Households Accumulation of Assets and Liabilities
House Price Inflation % 10 20 30 40 0 -30 1984 Q1 1984 Q4 1985 Q3 1986 Q2 1987 Q1 1987 Q4 1988 Q3 1989 Q2 1990 Q1 1990 Q4 1991 Q3 1992 Q2 1993 Q1 1993 Q4 1994 Q3 1995 Q2 1996 Q1 1996 Q4 1997 Q3 1998 Q2 1999 Q1 1999 Q4 2000 Q3 2001 Q2 2002 Q1 2002 Q4 2003 Q3 2004 Q2 2005 Q1 2005 Q4 2006 Q3 2007 Q2 2008 Q1 2008 Q4 2009 Q3 0 2 4 6 8 -6 -4 -2 10 Consumption Growth % -20 -10
UK House Price Inflation and Consumption Growth
UK Consumption & House Prices
Draw two AD diagrams to show the shifts in AD during these two time periods
House price inflation Date Growth in consumption
UK Consumption Fuelled By Credit

September 1988 September 2008 % of annual disposable income 109.5 75.2 34.4 % of liabilities % of annual disposable income 174.8 billions
% of liabilities
billions
Financial Liabilities
311.2
100.0
1568.3
100.0
Secured Debt
Unsecured Debt
213.7
97.5
68.9
31.1
1182.7
385.6
75.4
24.6
131.8
43.0
Secured Debt: Property acts as collateral for the debt, which can be used to pay off the debt if necessary. Unsecured Debt: No property is needed as collateral. Usually used to fund purchase of small items.
Total Debt / Secured Debt (m) 400000 600000 800000
200000
1000000
1200000
1400000
1600000
0 01-Apr-93 01-Oct-93 01-Apr-94 01-Oct-94 01-Apr-95 01-Oct-95 01-Apr-96 01-Oct-96 01-Apr-97 01-Oct-97 01-Apr-98 01-Oct-98 01-Apr-99 01-Oct-99 01-Apr-00 Date 01-Oct-00 01-Apr-01 01-Oct-01 01-Apr-02 01-Oct-02 01-Apr-03 01-Oct-03 01-Apr-04 01-Oct-04
Total debt
UK Debt 1993-2009
Secured debt 01-Apr-05 01-Oct-05

01-Apr-06 01-Oct-06 01-Apr-07 01-Oct-07 01-Apr-08 01-Oct-08 01-Apr-09 01-Oct-09 0 50000 150000 200000 250000
UK Consumption Fuelled By Credit
Unsecured debt
Unsecured Debt (m)
100000
Investment
Investment Spending on capital projects Firms must be confident in order to invest in capital projects. Stimulates AD
Investment Intentions
Investment Capital Spending
Draw two AD diagrams to Investment Capital show the shifts in AD during these two time periods
Spending
Investment Decisions
What factors will a firm consider when deciding to increase or decrease investment?
Investment Decisions
The interest rate
Will determine the cost of borrowing The lower the interest rate, the more borrowing will occur
Expectations of Demand
Firms will only invest if there is future demand for their products
Technological Markets
If the firm operates in technological markets investment in crucial in maintaining profits
Cost Reduction
New investment will occur if it reduces the costs of production
Creating an Investment Environment

The Bank of England want to create an environment to stimulate AD through investment. Reduced base rate of interest to 0.5%. Reduce cost of borrowing and to discourage saving. Encourage spending , borrowing & investment. http://news.bbc.co.uk/1/hi /business/7925251.stm
But consumers are saving more due to uncertainty!
Creating an Investment Environment
If interest rates alone arent enough to stimulate consumption and investment what is?

Aggregate Demand l1

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Aggregate Demand

Aims and Objectives

2012 Q4 Economy Shrinks

Breaking news Mr Young was right again! Triple dip?

2012 Q4 Economy Shrinks

Disruption to North Sea Oil and Gas Extraction maintenance etc

Aggregate Demands Components

Consumer Spending Closely Linked to Yd

Aggregate Demand Curve

Consumer Confidence & AD

UK Consumption & House Prices

UK House Price Inflation and Consumption Growth

UK Consumption & House Prices

UK Consumption Fuelled By Credit

Total Debt / Secured Debt (m) 400000 600000 800000

Secured debt 01-Apr-05 01-Oct-05

UK Consumption Fuelled By Credit

Investment Capital Spending

Creating an Investment Environment

But consumers are saving more due to uncertainty!

Creating an Investment Environment

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