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aggregate demand

Also more accurately referred to as aggregate expenditure, this is one of the key concepts introduced by John Maynard Keynes that still today is at the heart of most macroeconomic theories about the determination of the overall level of employment (and thus the level of national income produced) in a country's economy during a given year. Although there have turned out to be a number of logical problems and ambiguities in making the analogy work, Keynes's original basic notion was that “aggregate demand” represented a sort of grand total or summarization of all the various demand schedules for all the millions of different goods and services produced in a country's national economy. Thus, Keynes reasoned, just as the microeconomic theorist can fruitfully analyze the relationship between the various quantities of a particular good or service that will be purchased by consumers at various prices on a single market by means of a demand schedule or demand curve, the macroeconomic theorist can make similarly good use of an aggregate demand schedule or aggregate demand curve as a means for analyzing the relationship between the various possible grand totals of all goods and services purchased in the national economy (as measured by their total monetary value in the form of a national product estimate like GNP or GDP) and the general price level (as measured by some sort of comprehensive price index rather like those whose yearly rates of change are commonly used to measure inflation). Once he had the brainstorm that one could sum up all the demand schedules for individual goods into a single grand total “aggregate demand schedule,” it was not much of a mental leap for Keynes to conclude that it might be useful first to divide up aggregate demand into a small number of “subtotal” aggregate demand schedules whose interrelationships might help explain such large-scale macroeconomic phenomena as the business cycle, inflation, economic growth and the like. Thus Keynes invented most of the basic ideas of what is today the macroeconomists' conventional system of national income accounting when he formulated his famous aggregate demand identity Y = C + I + G + (X - M) which simply means that a single country's aggregate demand for national product (Y) is always equal to the total demands of its households for Consumer goods and services (C), plus the total demands of its firms for Investment goods (I), plus the total demands of its various Government agencies for goods and services (G), plus the net demands of foreign consumers, firms and governments for the country's goods and services (exports minus imports).

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