Economic Growth refers to the expansion of a countries productive possibilities. Economic growth is measured by changes in real GDP. The level of increasing economic growth will determine, to a large extent, people's incomes and living standards in a country. Macroeconomic theory which involves the study of aggregate economic behavior (or economic activity in the economy as a whole) is used to analyse the main components of economic growth. Any changes made to the level of economic growth impact on the overall level of economic activity in producing business or trade cycles.
Macroeconomic theories were developed by John Maynard Keynes. According to Keynes the level of economic activity was determined by total expenditure by consumers, firms, governments and net exports. Keynes developed the notion of equilibrium income, which was the level of income in the economy from which there was no tendency for change. From the circular flow of income model, income, expenditure and Output are different ways of measuring the value of GDP, with total expenditure equaling the total value of output, which in turn equals the total incomes received by the owners of productive resources in the economy.
Aggregate demand refers to the sum of expenditure on domestic output by households, firms, the government and the foreign sector in an open economy. If we presume a 5 sector circular flow of income model of the economy, in equilibrium, a nations output, income and employment are determined by the level of aggregate demand or expenditure. Aggregate demand represents the sum of aggregate consumption, investment, net government spending (G-T) and net exports (X-M), the equation would be as follows AD = C + I + G + (X-M).
The components of aggregate demand include the Consumption function, which has two components, one autonomous (independent of national income) and the other induced or dependant on income.
