What is Aggregate Demand?

By Samuel Phineas Upham

Understanding the limits of demands for a particular good is an important part of macroeconomics. If a country has an export, it needs to consider how important that good is to both the rest of the world and the local economy. The aggregate demand represents how much households are willing to spend on a good, and it’s part of gauging a country’s GDP.

Aggregate demand, if it were to be illustrated, would be like several circles revolving around two areas: the household and the business. The household requires income, which it earns from business (either employment or self-employment). That income is used to purchase goods and services. If anything disrupts this balance, economists broadly refer to those as “factors,” the entire economy feels the change.

Aggregate demand is typically represented in something called a curve, often drawn as a straight line and may arguably be a rectangular hyperbola in shape. The slope is always curved downward, which is described as normal economics.

The relationship between the demand and price changes is crucial to understanding this curve. If there were a rise in the cost of domestic goods, for example, exports become less competitive. It becomes expensive to produce the good, and exports drop in value when the costs of shipping are factored in. Liquidity plays a major role as well. If you only have so much money, and over half of that goes to rent, you don’t have money to spend on expendable goods and that has a residual effect on businesses and banks as they tighten their own belts.

About the Author: Samuel Phineas Upham is an investor at a family office/ hedgefund, where he focuses on special situation illiquid investing. Before this position, Phin Upham was working at Morgan Stanley in the Media and Telecom group. You may contact Phin on his Samuel Phineas Upham website or LinkedIn.