The total demand in the economy for goods and services is called the aggregate demand and it is made up of several components of the circular flow.

Aggregate demand (AD) consists of four components:

Consumption (C):

This is also known as consumer expenditure. It consists of spending by households on goods and services.

Investment (I):

This is spending by private sector firms on capital goods.

Government spending (G):

This covers government spending on goods and services.

Net exports (X–M):

This is the difference between the value of exports of goods and services and the value of imports of goods and services.

Thus

AD = C + I + G + X − M