Understanding how global events affect our own economy is really important for Year 13 Economics students. With everything changing quickly around us, let’s simplify this!

What Are Aggregate Demand and Aggregate Supply?

First, let’s clarify what we mean by aggregate demand (AD) and aggregate supply (AS).

• Aggregate Demand (AD) is the total demand for everything that people and businesses want to buy in our economy at one time. It includes four main parts:

  1. Consumption (C): Money spent by households.
  2. Investment (I): Money businesses spend on things to help them grow.
  3. Government Spending (G): Money the government uses on goods and services.
  4. Net Exports (NX): The difference between what we sell to other countries and what we buy from them.

• Aggregate Supply (AS) is the total amount of goods and services that companies plan to sell in a certain time. AS can change due to things like production costs, technology, and how many workers are available.

How Global Events Can Affect Domestic AD

Global events can change the parts of aggregate demand. Here are some examples:

1. Economic Problems in Big Trading Partners: If a major trading partner like the United States or China has economic problems, they might buy fewer imports. For example, if the UK sells many goods to China and China struggles, UK exports could drop. This would lead to a decrease in net exports (NX) and lower aggregate demand.

2. Shifts in Consumer Confidence: Global issues, like political problems or health crises, can make people worry. If people around the world feel unsure about their future, they might spend less money, which will lower aggregate demand.

3. Changes in Global Commodity Prices:

   • For example, if oil prices rise because of political unrest, businesses may face higher costs. When companies have to pay more to produce their goods, they might raise prices for consumers. This could lead to a drop in consumption demand (C).

How Global Events Can Affect Domestic AS

Global events also greatly influence aggregate supply. Here are some important points:

1. Supply Chain Issues:

   • A great example is the COVID-19 pandemic. When countries had to lock down, many supply chains got messed up. This caused shortages of products, which made the short-run aggregate supply (SRAS) curve shift to the left. The result? Higher prices and less stuff available.

2. Costs and Availability of Inputs: If a natural disaster happens in a country that produces important resources, it can affect how available those resources are. For instance, if Brazil has a drought that impacts coffee production, coffee prices will spike worldwide, making it more costly for local companies and shifting AS leftward.

3. Technological Changes: New technology developments around the world can also impact AS. If a big country creates better production technology, local businesses might need to catch up or invest in these new technologies to compete, which can affect how much they can supply.

Conclusion

In short, global events can seriously influence both domestic aggregate demand and supply. Changes in trade relationships, costs of materials, or consumer confidence all show how connected our economies are. It’s essential for A-Level students to understand these changes to analyze future economic behavior in our world. Remember, the global economy is like a web, and a change in one part can affect everything else!