How aggregate demand and related GDP?


According to Keynesian macroeconomic theory, gross domestic product (GDP) is a way of measuring production of the country. Aggregate demand is GDP and shows how it relates to the price levels. Quantitatively, aggregate demand and GDP in the same way.

A Keynesian economist might point out that GDP is only aggregate demand in the long-term equilibrium. This is because in the short run, aggregate demand always measures total production for a given level of prices (not necessarily equilibrium). In most macroeconomic models, however, the price level is considered equal to “one” for simplicity.

This should always be so that the increase in aggregate demand will increase GDP two figures are one and the same.

The calculation of aggregate demand and GDP

There are actually three methods of estimation of GDP:

  • the total value of all goods and services sold to final users
  • the amount of payments and other production costs
  • the sum of value added at each stage of production

Essentially, all these measurements are tracking the same. Some differences can occur based on the data sources, terms and mathematical methods which were used.

In General macroeconomic indicators as GDP, total share demand the same equation:

GDP and aggregate demand = total consumption expenditure + gross private investment + total government spending + net export – import

You can also see the equation written thus: GDP AD = C + I + g + NX

Potential Problems

GDP and aggregate demand is often interpreted to mean that economic growth is driven by the consumption of wealth, not its production. In other words, it hides the structure and relative production efficiency under the total costs.

In addition, GDP does not take into account the nature of what, where and how is created the product. For example, it does not distinguish between produce in the amount of $100,000 toenail clippers vs $100 000 computers. Thus, it is a bit unreliable gauge of actual wealth or standard of living.

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