Question

Place the three components of aggregate demand in order of relative size, starting with the one representing the largest component of GDP.
a. net exports
b. consumption
c. investment

Answer 1

Answer:

The order, in terms of relative size, will be as follows:

(b) Consumption

(c) Investment

(a) Net Exports

Explanation:

The aggregate demand consists of the sum of four components which are government spending, consumption, investment and net exports.

Amongst which the consumption is the largest component of all, as it represents the total income spent by an individual or household on the goods and services in the economy. It's calculation is dependent of several factors such as disposable income, interest rates and future economic conditions.

Investment is the second largest component, after consumption, as shifts in it's value results in improvement/fall on the quality and quantity factors of production in the long run.

In terms of size when compared with the other components, the Net Exports stands as the smallest component. Practically due to the fact that it is calculated after deducting imports from exports.