Aggregate Demand

This is a MacroEcon $5 word; it basically just means "everything bought in a given year, in a given country". Aggregate means the total composite, so the aggregate demand is the total demand in an economy.

It measures the value of spending on all final goods and services in an economy, during a given period of time. The spenders, or buyers, in an economy are consumers, firms, the government and foreigners, so the formula for aggregate demand is the sum of these:
AD = C + I + G + Xn
C = Consumption (consumer spending)
I = Investment (spending by firms on capital goods)
G = Government spending
Xn = Exports – Imports

You might be scratching you head, thinking you have seen this exact formula for GDP, or Gross Domestic Product, which is the value of all final goods and services produced in an economy, during a given period of time. GDP can be measured by three different methods: the expenditure approach, the output approach, and the income approach. Theoretically, all of these approaches should render the same value, since spending should equal income, which should equal the output produced in an economy. There is a circular flow that models this, but reality tells a different story. Anyway, the point is that AD and GDP are measured the same and should have the same value.

When any of the values in the formula changes, well, as students of mathematics, we know the value of AD will change. Say, for example, that consumers spend more money. C increases, so AD also increases. Let's look at some reasons the components of AD will change:
Interest rates: since this is the price of money, when the interest rate increases, borrowing becomes more expensive. Consumers and firms will borrow less, spending less, and AD decreases. When interest rates decrease, AD will increase.

Consumer and Business Confidence: when people are feeling good about the future of the economy, that they will have jobs, that business is stable, and that they can pay back loans...borrowing and spending will both increase. AD increases. However, the fear factor can wreak havoc on the economy, and when people fear the future, they stop borrowing and stop spending, and AD will decrease.

Future expectations: when consumers and firms are worried about inflation, this can change spending. Inflation is a rise in the general price level of goods and services. When spenders anticipate future inflation, they will increase spending now so that they get things at a lower price. AD will increase. When spenders anticipate a future drop in prices, they will stop spending now and wait for the lower prices, so AD decreases.

Household wealth: wealth and income are not the same. Wealth is the value of assets, such as houses, investments and so on. When households become wealthier, say, when the value of their home increases rapidly, or their stock portfolio performs well, people feel wealthier and will spend more money. Which is why asset bubbles cause so much damage to the economy. They breeds a false sense of security. Since spending is increasing, so does AD. After the bubble bursts and people feel less wealthy, spending grinds to a halt and AD decreases.

Exchange rates: let's not forget about the role of spending in the international markets. When the exchange rate of a country depreciates, that country's goods become cheaper to foreigners. Let's use the USD as an example. When the USD depreciates against the Mexican peso, American goods become cheaper for Mexicans, so Mexicans buy more American goods. American exports increase, which causes AD to increase. At the same time, Mexican goods become more expensive for Americans, so imports decrease, and AD increases. When the exchange rate appreciates, goods and services become more expensive, so exports decrease and AD decreases. Using our example, if the USD appreciates, Mexicans will stop buying American goods, and Americans will increase spending on Mexican goods. U.S. exports decrease and imports increase, so AD decreases.

Side note: the U.S. has accused the Chinese of artificially devaluing the yuan just for this very reason...to keep their goods relatively cheaper, and GDP higher. Tricky to prove.

Aggregate demand increases are good, decreases are bad. Increases lead to more output being produced, which means more jobs and lower unemployment. Yet, AD increasing too rapidly leads to inflation, so we don't want too much of a good thing. AD decreases lead to less output, so firms need fewer workers. At least this is the Keynesian argument- that consumption drives demand which drives production and output. Monetarists think production drives the economy. See, nothing is simple and even AD is controversial.

22) ALLOWANCE FOR BAD DEBT:
Also, called the "Allowance for doubtful accounts", which is a bit more of a positive take on a gloomy topic. Banks record their estimates on loans they predict will go into default and not be repaid using the allowance for bad debt account.

Accountants must have balanced balance sheets, or why would they be called balance sheets. The allowance for bad debt is a category accountants use to balance their sheets. Say a bank loans out $10,000 and estimates that 5% of the loans will go into default. The banks accountants will enter $500 as a bad debt expense as a debit in accounts receivables, and $500 credit as an allowance for bad debt. So, basically, the allowance for bad debt is a way to offset the bad debt estimate. It's like a reserve in case a customer doesn't pay up.

If a customer actually doesn't pay up, say in our example, a customer defaults on $100. This will be recorded as a $100 credit in accounts receivable to lower this amount, and as a $100 debit in the allowance for bad debt account. Seems a little counterintuitive, but it works.