Components of Consumer spending

1031 Words3 Pages

Components of Consumer spending Gross Domestic Product (GDP) is the final value of all goods and services produced domestically in a year, minus any trade deficit. It can also be interpreted as the sum of the total spending of its component parts. There are several components of GDP, and those include Consumer Spending (C), commercial and residential Investment Spending, Government Spending, and Net Exports (value of all exports minus the value of all imports). The largest component of GDP is Consumer Spending, totaling about 6.255 trillion dollars in 1999, or sixty seven percent (67%) of GDP. Like GDP, Consumer Spending (here after C) is also determined by several component parts. C is the sum of consumer spending on Durable Goods (DG: goods that can be stores and have an average service life of three years), Non-Durable Goods (NDG: storable goods with service life of less than three years.), and Services Spending (S: commodities that cannot be stored and must be consumed at the time of purchase). This paper will deal exclusively with the C component of GDP, and more specifically with the components of C and their changes from 1959 until 1999. I choose to use Nominal GDP for my analysis because the actual dollar values are less important than the changes in the proportions of the components relative to GDP. All of the data used in this paper came from, or was derived from the Economic Report of the President (February 2000), Appendix B, prepared by the Counsel of Economic Advisors (available online at *http://w3.access.gpo.gov/usbudget/fy2001/erp.html#erp4*). In the period from 1959 until 1999, Consumption (C) increased from approximately 63% of GDP to about 68%, with an overall increase of about 7.88%. However, the proportions of the components of C, namely Durable goods spending (DG), Non-Durable goods spending (NDG), and Services spending (S), do not seem to move in a corresponding way. Of the three components, NDG suffered a dramatic loss as a share of GDP (-31.98%), DG remained nearly the same (-2.6%), and S increased by nearly 58%. I will treat each of these components separately in a discussion of some of the underlying reasons for their relative changes. Of the three components of Consumer spending, Durable goods spending has changed the least. In 1959 about 8.42% of GDP was spent on DG, while in 1999 DG comprise... ... middle of paper ... ...cted by technology in the sense that in other industries, technology makes it ultimately less expensive to produce, whereas in medicine, technology makes treatment more effective, but also more expensive. All of these facts are compounded because the demand for medical care is both high and inelastic. Medicine isn’t the only market that has seen substantial price increases. The CPI for entertainment (movies, concerts, sporting events) in 1997 was 162.5 (1982-83 = 100). It is not surprising that Americans would be spending more money on the least tangible of purchases when one considers that real income has increased from $9,068 in 1959 to $23,310 in 1999 (Chained 1996 dollars). This real increase in income has had a direct effect on Consumer consumption relative to GDP. Since Americans are making more money than ever before (in aggregate), it makes sense that they will spend more money. Judging by the past, incomes will continue to rise which leads consumers to spend more now and save less, which in the short run increases output and therefore income, but in the medium to long run will cause slower accumulation of capital and therefore slower growth of output and income.

More about Components of Consumer spending

Open Document