Aggregate Demand refers to the value of final goods and services which all sectors of an economy are planning to buy during a year.

Components:

(i) Private final Consumption expenditure

(ii) Government final consumption expenditure

(iii) Investment expenditure

(iv) Net exports.

Detailed Answer:

Aggregate Demand implies the total demand of final goods and services by all the people in an economy. It expresses the total demand in terms of money. In this manner, it can be defined as the actual aggregate expenditure incurred by all the people in an economy on different goods and services.

The components of aggregate demand are enlisted below:

(i) Private Consumption Expenditure (C): Private consumption expenditure refers to the total expenditure incurred by all the households in an economy on different types of final goods and services in order to satisfy their wants. Consumption depends on the level of the disposable income. There are two types of consumption expenditure: Autonomous Consumption Expenditure and Induced Consumption Expenditure.

(ii) Private Investment Expenditure (I): Private investment expenditure refers to the planned (ex-ante) total expenditure incurred by all the private investors on creation of capital goods such as, expenditure incurred on new machinery, tools, buildings, raw materials, etc. Broadly, investment can be categorised in two types: Autonomous Investment Expenditure and Induced Investment Expenditure.

(iii) Government Expenditure (G): Government expenditure refers to the total planned expenditure incurred by the government on consumption and investment Purposes to enhance the welfare of the society and to achieve higher economic growth rates.

(iv) Net Exports (X - M): Net exports refers to the difference between the demand for domestically produced goods and services by the rest of the world (exports) and the demand for goods and services produced abroad by the residents of a country. In other words, it is the difference between the exports and imports.