Components of AD and AS

CONSUMPTION: Consumption expenditure is spending by households and

individuals on durable goods, nondurable goods, and services. Examples
include purchasing food, movie tickets, and vacations.

Some Factors that affect consumption are, disposable income, expected

future income, and wealth or credit.

INVESTMENT: This is spending on capital goods such as plant and

equipment and new buildings to produce more consumer goods in the
future by businesses. Investment includes foreign investment and
domestic investment. Foreign investment by government appears in the
financial and capital accounts of the BOP; such as foreign bonds,
securities, treasury bills. The government has no profit motive in these
investments, it is for the welfare of the general public. Business
investments do carry a profit motive.

Capital investment spending in the UK accounts for between 15-20% of

GDP in any given year.

GOVERNMENT EXPENDITURE: This is spending on state-provided goods

and services including public goods and merit goods by the government.
This spending is categorized into transfer payments and capital spending.
Transfer payments include pensions and unemployment benefits and
capital spending is on things like roads, schools and hospitals.
Governments spend for public welfare, increase AD and to re-distribute
income.

EXPORTS: Exports are the goods and services produced in one country
and purchased by residents of another country. When the country exports
more than it import, it has a trade surplus on BOP. US exported $1.12
trillion in goods between January and August 2018.

SAVINGS: Savings are leakages from circular flow of income occurring

when people decide to postpone their consumption until a future time. It
is household or business income that is not spent. Money can be saved in
banks, pensions, stock markets etc.… The higher the savings ratio in a
country, the lower the consumption and AD in that country would be. For
example; The saving ratio in UK has been falling since 2010 due to strong
customer spending. People might save for various reasons, for short terms
reasons such as holidays or for long tern reasons such as paying kids
college fees.

TAXATION: Taxation is a compulsory payment made by an individual to a

certain body; usually the government. It is charged on workers' income
and business profits, or added to the cost of some goods, services, and
transactions. Governments use taxation to encourage or discourage
certain economic decisions and it is the principal source of revenue for
them. There are two type of taxes; direct taxes and indirect taxes.

A direct tax cannot be transferred to a second or a third party.

Income tax is an example of direct taxes. This is divided further into two
parts; progressive income tax (the higher the income, the more the tax to
pay), and regressive tax (the more you earn, the less you pay). Direct
taxes are usually designed to be progressive, and so can be effective in
redistributing income

Indirect taxes are taxes imposed on goods and services. The burden
of these tax can be passed on to a third party such as the consumers.
Indirect taxes tend to be regressive, such as VAT, so this might result in
increased inequality and create inflation.

IMPORTS

Imports are the value of foreign goods and services bought by a country's
households, firms, government agencies, and other organisations in a
given period of time. Import spending is a leakage (or withdrawal) out of
the circular flow of income. Countries may have to scarcity or lack of
certain natural resources; Philippines having to import oil as they do not
produce imports.

There can be visible imports such as final products, semi- finished goods
or invisible imports such as locals spending abroad as tourists.