Aggregate Demand, Aggregate Supply, and GDP in Developing Countries, Essay Example

Aggregate demand is the total output level of an economy, which includes consumption, Investment, Government expenditure, Exports and Imports of a country.

On the other hand, aggregate supply involves the total amount of goods and services, which firms within a country’s economy intend to supply, sell to the market at a given time (Rao 35).

The gross domestic product of a country indicates the total value of final products, whose production was within the country’s geographical boundaries.

The level of gross domestic product of a country comes from the interrelationship between the aggregate demand and aggregate supply of the economy. Most developing countries have low gross domestic product levels, mainly because of the low aggregate demand in their economies (Brian Snowdon 150).

Consumers in most developing countries prefer present consumption to future investment. Investment in capital goods has an extensive impact on the GDP of any country because it affects many variables. First, investment in capital goods will create job opportunities, which will increase the real income of consumers within the economy, raising their per capita income (John Bradley 60). Still on consumption, individuals in developing countries finance their present consumption with borrowed funds. This reduces the level of GDP growth because normally; we expect that individuals finance their present consumption with available income.

Another component of aggregate demand that affects GDP levels in developing countries is the level of government expenditure. Developing countries lack adequate funds and resources to finance projects and development strategies that could spearhead the process of GDP growth. We know that developing countries have limited natural resources, and inadequate financial capability, which are the key components of government expenditure. Government expenditure is the primary source of job opportunities and infrastructural development, which is the backbone of any GDP growth efforts (Wessels 125).

Thirdly, developing countries have low GDP levels because most of them, especially African countries depend of agricultural products as their main exports. Primary agricultural products, in their raw state usually fetch extremely low returns in the world market. When they export these raw agricultural products to the western countries, they undergo value addition. This increases their worth. The western countries export these products back to the developing countries (Roger E. A. Farmer 215). At the end of it all, the developing countries incur losses through agricultural production.

Developing countries also engage so much in the importation of products than exports. They end up having negative balance of payments, which reduces the level of Gross domestic product. We can explain this overreliance on imports by the fact that developing countries lack the required technological base and technical knowhow in the production of many products, especially in the manufacturing industry (William J. Baumol, Macroeconomics: Principles and Policy 176). For example, a country like Kenya usually exports textiles and yet the same country produces cotton. It exports the raw cotton to developed countries because it does not have the required technological infrastructure to process the cotton into ready textile.

The level of total output that firms in developing countries are willing and able to supply in the world market is remarkably low. This is usually because of a number of reasons. First, the unequal production potentials between the developed countries and the developing countries bring in imperfections. Developed countries benefit from scale economies due to large-scale production, unlike developing counties who lack the machinery to produce on a large scale.

Secondly, developing countries are usually victims of international market price fluctuations. This is usually the case because of the small market share of these countries in the international markets (Robert E. Hall 66).

Structural limitations like political instability and general national insecurity also contribute to lower aggregate supply in developing countries, hence low gross domestic product levels (Brian Snowdon 150).

In conclusion, it is clear that aggregate supply and aggregate demand are serious components in determining the level of GDP in any country. Therefore, developing countries should come up with ways of increasing and stabilizing their levels of both total demand and supply to succeed in their efforts of raising their Gross Domestic Products.

Works Cited

Brian S. and Howard R. Vane. Modern macroeconomics: its origins, development and current state. Chicago: Edward Elgar Publishing,, 2005.

John B. and Connell Fanning. Aggregate supply, aggregate demand, and income distribution in Ireland: a macrosectoral analysis. New York: Economic and Social Research Institut, 1984.

Karl E. and Case, Ray C. Fair. Principles of Economics. New York: Prentice Hall, 2004.

Rao B. and Bhaskara. Aggregate demand and supply: a critique of orthodox macroeconomic modeling. New York: St. Martin’s Press, 1998.

Robert E. H and Marc Lieberman. Economics: Principles and Applications. Michigan: Cengage Learning, 2009.

Roger E. and  A. Farmer, National Bureau of Economic Research. Aggregate demand and supply. Chicago: National Bureau of Economic Research, 2007.

Wessels and Walter J., Economics. Michigan: Barron’s Educational Series, 2006.

William J. B. and Alan S. Blinder. Economics: Principles and Policy. New York: Cengage Learning, 2011.

Macroeconomics: Principles and Policy. New York: Cengage Learning, 2010.