Aggregate spending and aggregate demand estimate national income. Both consider consumption, investment, government expenditure, and net foreign-factor receipts. Aggregate demand is sensitive to inflation, while aggregate spending responds to current and projected incomes. Both are important for policy makers and business planners to predict the direction of GDP.
Aggregate spending and aggregate demand are macroeconomic concepts that estimate two variants of the same value: national income. In the sub-specialty considered national income accounting, the market value of all products and services are added together to estimate gross national income, the aggregate wealth produced by the country. Both aggregate expenditure and aggregate demand consider consumption, investment, government expenditure, and net foreign-factor receipts as the basic components of economic demand. When the economy is in equilibrium, the levels of consumption expenditure, investment, government expenditure and net foreign factor receipts equal total effective demand and, therefore, the value of all goods and services supplied by the economy.
However imperfect quantitative models are, aggregate spending and aggregate demand are vital to policy makers and business planners. Decision-makers must act not so much on the estimated value of the economy, but on the direction it is taking. Four years after the recession that began in mid-2007, for example, policymakers on both sides of the Atlantic were concerned that GDP appeared to weaken in the spring and summer of 2011. The economies of major industrial nations appeared to be in about to slip into another recession before their populations had even had a return to solid economic growth.
The aggregate demand function is, with the exception of government spending, sensitive to the general price level or to inflation. Government outlays are the exception to the rule because tax budgets usually increase independently of the cost of goods and services. Budgets are usually heavily influenced by political and social goals. On the other hand, consumers, investors and foreign traders are able to buy less when inflation rises. Thus, the aggregate demand model is the classical downward sloping curve between demand and price.
Other things being equal, the demand line moves downward in response to the unit price. Furthermore, when the general price level rises, the aggregate demand curve shifts to the left. Inflation reduces the volume of goods and services transacted. The same thing happens for aggregate expenses because its components are almost similar. The key difference is that the aggregate expenditure side of the national accounts of revenue breaks down planned and unplanned investment.
Where aggregate demand is price sensitive, aggregate spending responds to current and projected incomes. Aggregate spending and aggregate demand therefore differ in that aggregate spending conforms to the classical upward-sloping revenue-expenditure pattern. Somewhere along the trend line, aggregate spending intersects with real GDP at the equilibrium point between rising consumer expectations, stabilized net export income, and producer inventories adjusted for purchasing rates. By knowing where incomes are going, the aggregate spending model can then be employed to predict the direction in which GDP is moving in the next quarter or year.
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