The school which I attend, and the economics course which I have taken has a distinctly Keynesian approach to it, which comes as no surprise given that the course is a British A-level.
Eitherway, I was thinking about aggregate demand, which according to my textbook is formulated as C+I+G+X-M. The letters stand for Consumer spending, Investment, Government spending, Exports, minus iMports.
What I was wondering about, is why Investment counts as increasing aggregate demand within an economy. If Investment in capital goods such as machinery ends up raising productivity and hence supply, why is this part of aggregate demand and not aggregate supply? When I asked, I was told there was no formula to determine aggregate supply...
So my questions are:
Here is a critique
Publisher, Laissez-Faire Books
Wait so let me get this right, Aggregate Demand "reflects the supply of loanable funds andthe supply of money". Why is it called demand then? By supply of loanable funds does the article imply fractional reserve ratios ?
That article clarifies the inconsistencies of teaching AD/AS without teaching IS/LM, and critisizes oversimplification and misrepresentation, but I still don't understand all of the article, as in the economics behind it. And yes, for the record we haven't been taught anything to do with IS/LM and doubt that we will, so he is so far entirely right in that article.
Anyway, if some sort of more detailed explanation of the theory behind ADAS is possible, I would really appreciate it.
The ASAD form of analysis is horribly confused. You should give Hoppe's article on Keynesian economics (in the reading list) a read, where he points out some of the inherent confusions. Anyway, as I was taught it Investment goes under AD due to a demand for loanable funds; but it also affects AS by expanding production. I did ISLM in my first year on my economics course.
2. Aggregate demand is about the same as GDP and is one way of calculating it.
3. Investment requires goods that must be demanded to exist.
4. We have numbers to put on aggregate supply as well. However, aggregate demand is about the same as aggregate supply: only import and export make a difference.
5. It is feasible to have a formula for aggregate supply. That formula would not necessarily include investment because investment is not supply as such: investment is not supplying products to anyone.
Fred Furash:What I was wondering about, is why Investment counts as increasing aggregate demand within an economy. If Investment in capital goods such as machinery ends up raising productivity and hence supply, why is this part of aggregate demand and not aggregate supply?
What I was wondering about, is why Investment counts as increasing aggregate demand within an economy. If Investment in capital goods such as machinery ends up raising productivity and hence supply, why is this part of aggregate demand and not aggregate supply?
Well, just apply that analysis to consumption. If there were no consumption expenditures, then nobody would supply anything, so in a sense (though admittedly not the same sense as in your quote) consumption should be part of aggregate supply.
My point is that just because something is causally related to AS, doesn't therefore rule it out as being part of AD. The specific answer is that capital goods are part of the economy, and so if you are trying to measure how much total "stuff" is being purchased, then you obviously must include spending on investment.
When I asked, I was told there was no formula to determine aggregate supply...
Hmm. I think that's a terrible answer to your question, first because it's not really true, and second because it misses the obvious answer (which I gave above).
It's true that people don't usually talk about AS, just about AD. I think it's not a theoretical issue, just that in practice it's easier to get the data to compute GDP (which is usually what the whole point of the exercise is) going via the AD route.
Does Austrian economics regard aggregate demand and supply as genuine or not? 2. Why is Aggregate Demand equated with GDP? 3. Why does Investment count as part of aggregate demand? 4. How is it possible to make any calculations using demand/supply diagrams if we have numbers to put on Aggregate Demand, but not Aggregate Supply. 5. In light of the above, is it feasible to have a formula for Aggregate supply? Would this formula include Investment?
2. Why is Aggregate Demand equated with GDP?
3. Why does Investment count as part of aggregate demand?
4. How is it possible to make any calculations using demand/supply diagrams if we have numbers to put on Aggregate Demand, but not Aggregate Supply.
5. In light of the above, is it feasible to have a formula for Aggregate supply? Would this formula include Investment?
Very quickly:
1. Austrians of course believe that there are lots of goods, and then you can analyze things from the demand or supply side. But no, Austrians don't think it's very useful to think in terms of AD / AS.
2. In equilibrium--and in a closed economy--AD equals AS. So that's why AD = GDP. It's like saying that the demand for apples equals the output of apples. Notice that to be precise, you mean the *quantity* demanded, not the entire demand curve.
BTW I'm not sure the guy above is right, when he says that imports can make AD be unequal to GDP. I think what he has in mind is that, say, a country that has a net trade deficit is demanding more goods than it is producing, i.e. AD > GDP. But since the formula you gave above explicitly takes into account the trade surplus or deficit, I'm thinking maybe it avoids that kind of deviation. But I would have to double check a textbook to be sure.
3. See above.
4. Just think in terms of supply and demand in a micro market. Remember too that AD is just giving you a specific number, it's not the entire curve. So if you compute that in 2007 AD = $15 trillion, then you know what GDP and hence AS was too.
5. If you are doing a formal model, where the "price level"adjusts to equate AD and AS, then yes of course you need a formula for AS. I'm not sure if "investment" would be in there. Certainly if you were actually modeling the individual sectors of the economy, then you would include the supply function(s) for firms making tractor trailers, selling lumber, etc. But I think you mean, is there a formula the way there is for AD. I think maybe what you have in mind is that there are two ways of calculating GDP, the income vs. the expenditure approach. And so the money people spend on investment has a corresponding entry (or entries) on the income side, but I would need to look at a textbook to refresh my memory. I don't know if it would be a self-contained category, or would just trickle into other things. E.g. if someone invests in a machine for a factory, that counts as an investment expenditure. But it is labor income to the people who work at the factory that builds the machine, or it is revenues to the company that sales the machine, etc.
This stuff gets really complicated really quickly.