What is the difference between GDP and Aggregate Demand?

Both of them have the same equation.

x (Both) = Consumption + Investment + Government Spending + (Exports - Imports)

Or am I wrong?

Thanks,

Reply 1

Kendra

In the long run equilibrium, yes they are the same.

In the short run however - you have to remember that price plays a factor in Aggregate Demand - i.e. for a GIVEN price level how much are consumers spending?

Most (if not all) of the time you calculate AD - you assume the price level is "1" for simplicity.

Reply 2

trevthetrev

To put it really simply GDP is a measurment of a country's production, and AD is simply a way of showing how it is related to price levels, through the eyes consumers. AD shows the possible quantity levels for each level of price from a demand side, while the AS will show the possible quantity levels from supply side. Both will measure the same thing though, namely GDP! Hence the formulas are the same!