Aggregate demand (AD) refers to the total level of demand for goods and services in an economy at a given price level over a specific period. It reflects the overall spending by all sectors of the economy and is a key concept in macroeconomics for understanding economic fluctuations.

Aggregate demand is calculated using the formula: AD = C + I + G + (X – M), where:

• C represents household consumption spending on goods and services;
• I denotes business investment in capital goods;
• G indicates government expenditure on goods and services;
• X – M signifies net exports, calculated as the value of exports (X) minus imports (M).

Key features:

• AD is downward-sloping — as the general price level falls, real output and income increase (the wealth effect, interest rate effect, and exchange rate effect)
• The AD curve shows the relationship between the price level and the quantity of real GDP demanded
• AD is not the same as aggregate supply (AS) — AD reflects planned spending; AS reflects actual production
• Equilibrium national income occurs where AD = AS
• Shifts in AD (due to changes in C, I, G, X, or M) determine the level of national income at each price level
• AD is central to demand-pull inflation — when AD exceeds the economy’s capacity, prices rise
• The AD curve is used alongside the AS curve in the AD-AS model to analyse inflation, growth, and policy effects