Aggregate Demand

I haven’t really got a good answer to the questions above when it comes to the theoretical production model which you originally asked about, but regarding my simplified example of personal saving, I would need to save 96 every year after the initial year if I wished to maintain my personal “production structure” of “100 USD each year for the next two years”. This would be easily accomplished due to also recieving 100 USD every year.

I am not sure how that relates to the production structure, or if it does at all. Especially confusing is trying to figure out what “gross investment” means in my simplified example versus what it means in the theoretical model of the production structure.

The thought that first comes to mind is that part of the saving each year comes from the money spent on consumption in previous years that has travelled up the stages of production. In any specific year, only the consumer good industry has its costs covered by sales of consumer goods. The stages above this one have their costs covered by sales of capital goods which are paid for by the savings done from their higher-order stage customers which they have earned from past sales of consumer goods.

Not really a very good answer, but I just wanted to get it out there. In any case, I would really recommend De Soto’s book on banking and trade cycles, which I am also reading right now, but have not really grasped well enough to be very good at explaining it. He gives a very thorough explanation of the production structure model in chapter 5.

Ok, this is extremely nerdy and probably uninteresting for the majority of people even on an economics forum, but I discovered something curious about Gross Investment when recreating the production structure in De Soto’s book:

Gross Investment in year “0” represents precisely the discounted future cash flows that can be attributed to the productive capabilities of the capital goods paid for by Gross Investment that year.

Note however that the future cash flows are not just (the price of consumer goods) x (number of periods the presently available capital goods last). You must also deduct the land/labor required in the future periods that it takes to advance each of those goods further down the production stages. Here is my calculation or “proof”* if anyone is interested:

https://docs.google.com/file/d/0B_rHbEboAyLQc0hFSzFmMVRCZE0/edit

*it’s not really a proof in the strict sense as it doesn’t use symbols, but I don’t see why it shouldn’t hold for other values

There is no such thing as Agreggate Demand, as there is no such thing as a “price level” or a meaningful measure of “real output”. You can aggregate individual demand schedules for a single good into a market demand schedule for that good. But there is no meaningful way of aggregating demand schedules for multiple goods into a single demand schedule.