Global demand

Global demand is the key category in macro-economics. Global demand or total demand refers to amount of money, which the subjects of economy plan to spend on goods and services at the different size of income (or in other word - at given prices) in given period. In literature a shortcut - AD (aggregate demand) is used very often.

Total demand consists of:

• personal consumption expenditures
• gross private domestic investment
• gross government spending
• net export.

There are three subjects in economy: households, business companies and the government, which expenses are marked in literature with symbols:

C - Consumption,

I - Investment,

G - government spending.

Net export is a separate category (NX - Net eXport) and represents difference between national and foreign subjects expenses - NX = X - Im.

Description

The economy's equilibrium level is established as a result of the game of global demand and global supply in market economy. It means that the national product and level of prices are shaped on the level on which buyer's are willing to buy what enterprises are ready to sell. Equilibrium in real economies is seldom achieved and more often economies are not in this fixed point.

Curve of global demand

Fig. 1. Aggregated line of demand

The aggregate demand curve shows how many goods and services all subjects of economy can purchase at different total level of prices. It shows movement along the curve of global demand (ceteris paribus). In different case, the curve AD moves to the right (the profitable changes) or to the left (the unfavorable changes) depending on the evaluation in assessing the future path of demand (optimism or pessimism), the policy of government and central bank (the taxes, interest rate), as well as economic situation abroad (the change of profitability of export and import, the fluctuations of currency rate). It is connected with the fact that the size of purchases made by individual economic subjects influences prices and the power of external elements.

Curve has minus slope (negative) what means that the size of global demand changes the level of prices inversely. The angle of slope (of curve of global demand) depends on the strength of the reaction in change of interest rate in dependence from changes of money supply, strength of reaction of change investment expenses depends on change of interest rate, degree of changes of consumptive expenses depends on change in level of wealth, as well as from degree of change of the transactional demand on money in relation to change of national income. Therefore, crucial factor is the elasticity of global demand in relation to interest rates or level of global wealth.

Fig. 2. Equilibrium

Equilibrium on market of goods

Essential matter joined with global demand is defined equilibrium on market of goods. In a short period at fixed prices and pays (wages and salaries), equilibrium is the moment when planned global expenses (global demand) are in fact equal production. The drawing below is illustration of this problem.

In order to qualify long-term equilibrium on market of goods we have to include in analysis changes of prices and payments. Mechanism of establishing the equilibrium in such an incident takes into account global supply what is the subject of separate article.

See also:

• Artur Okun - Equality and efficiency tradeoff
• Factors affecting and types of demand

Examples of Global demand

• Consumer demand: Consumer demand is a measure of how much consumers are willing and able to purchase based on their income, available credit, and preferences. It is a key factor in determining the overall level of economic activity. Consumer demand is affected by a variety of factors, including changes in interest rates, consumer confidence, income levels, and the availability of credit.
• Investment demand: Investment demand is the demand for capital goods and other long-term investments by businesses. It is a key factor in determining the level of economic activity and is affected by the availability of credit, the cost of capital, and the perception of risk.
• Government demand: Government demand is the demand for goods and services by the government. It can be an important source of economic growth, particularly in developing economies. Government demand is affected by changes in government spending and taxation policies.
• Export demand: Export demand is the demand for a nation's goods and services from foreign countries. It is an important source of economic growth and is affected by changes in exchange rates, global economic conditions, and the competitive advantage of a nation's products.
• Domestic demand: Domestic demand is the demand for goods and services within a country. It is a major source of economic growth and is affected by changes in incomes, consumer confidence, and the availability of credit.

Advantages of Global demand

Global demand has many advantages to the economy. These include:

• Increased purchasing power. As global demand increases, consumers are able to purchase more goods and services, which in turn stimulates economic growth.
• Increased investment opportunities. As global demand increases, businesses can pursue investments in new markets and industries, which can lead to greater economic prosperity.
• Increased job opportunities. As global demand increases, businesses are able to create more jobs, which gives people more income and can lead to greater economic stability.
• Increased production. As global demand increases, businesses can increase production, which leads to higher levels of economic growth and a more robust economy.
• Improved living standards. As global demand increases, people are able to purchase more goods and services, which can lead to improved living standards and a higher quality of life.

Limitations of Global demand

Although global demand is a crucial element of macro-economics, it has several limitations. These include:

• The aggregate demand only considers the amount of money spent on goods and services, but does not take into account the quality and types of goods and services being purchased, or the impact of the purchases on the environment.
• Global demand does not factor in the impact of global trade and exchange rates on the demand for goods and services.
• Global demand does not account for changes in consumer preferences or changing production costs.
• Global demand does not consider the impact of government policies, such as tariffs and subsidies, on the demand for goods and services.
• Global demand does not take into account externalities, such as the impact of pollution on the environment.

Overall, global demand is an important element of macro-economics, but it has several limitations that must be taken into account when analyzing the global economy.

Other approaches related to Global demand

Global demand is also studied through the following approaches:

• Keynesian economics: Keynesian economics is an economic theory that argues that government intervention can be used to increase global demand and economic growth. This includes government spending and taxation policies to stimulate the economy, and using fiscal policy to help balance the impact of global demand on different sectors of the economy.
• Supply-side economics: Supply-side economics is an economic theory that argues that increasing the supply of goods and services will result in increased global demand. It focuses on increasing production and reducing taxes in order to stimulate the economy.
• Monetarism: Monetarism is an economic theory that argues that the money supply is the primary factor in determining global demand. It argues that increasing the money supply will lead to increased economic growth, as more money is available for consumers to spend.
• Rational expectations: Rational expectations is an economic theory that argues that individuals and firms make decisions based on their expectations of future economic conditions. This means that global demand is affected by the expectations of consumers, businesses, and investors.

In summary, global demand is studied through various economic theories, such as Keynesian economics, supply-side economics, monetarism, and rational expectations. Each of these theories offers different insights into how global demand is affected by economic policies and external factors.

Global demand — recommended articles

Foreign trade multiplier — Economic forces — Nominal exchange rate — Austrian business cycle theory — Monetarism — Demand shock — New keynesian economics — Currency Convertibility — Price stability

References

• Malmberg, A., & Power, D. (2005). On the role of global demand in local innovation processes. In Rethinking regional innovation and change (p. 273-290). Springer New York.

Author: Piotr Gawlewicz