Consumer Spending

9 Key excerpts on "Consumer Spending"

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  eBook - PDF

  Economics

  A Contemporary Introduction

  • William A. McEachern(Author)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Aggregate Demand 23 • When driving through a neighborhood new to you, how can you guess the income of the residents? • What’s one of the most predictable and useful relationships in macroeconomics? • Why are consumer confidence and business confidence in the economy so important? • How is spending linked to income? • Why did Americans spend less and save more after the financial crisis of 2008? Answers to these and other questions are addressed in this chapter, which focuses on the makeup of aggregate spending, especially consumption, to develop the aggregate demand curve. ©romakoma/Shutterstock.com Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 520 Y our economic success depends in part on the overall performance of the econo- my. When the economy grows, job opportunities expand, so your chances of find- ing a good job increase. When the economy contracts, job opportunities shrink, and so do your job prospects. Thus, you have a personal stake in the economy’s success. Consumption is the most important component of aggregate expenditure, accounting for about 68 percent of the total. We discuss how consumption and the other spending components relate to income in the economy. We then see how a change in the economy’s price level affects aggregate spending. All this is aimed at getting to the economy’s aggre- gate demand curve. In the next chapter, we develop the aggregate supply curve and see how the two curves interact to determine the economy’s equilibrium levels of price and output.

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  Macroeconomics

  Principles and Policy

  • William Baumol, Alan Blinder(Authors)
  • 2015(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  It can be expressed as the sum C I G I ( ) X I M X , where C is Consumer Spending , I is investment spending , G is government purchases , and X IM is net exports. 2. Aggregate demand is a schedule: The aggregate quan-tity demanded depends on (among other things) the price level. But, for any given price level, aggregate demand is a number. 3. Economists reserve the term investment spending to refer to purchases of newly produced factories, machin-ery, software, and houses. 4. Gross domestic product is the total volume of final goods and services produced in the country. 5. National income is the sum of the before-tax wages, interest, rents, and profits earned by all individuals in the economy. By necessity, it must be approximately equal to domestic product. 6. Disposable income is the sum of the incomes of all individuals in the economy after taxes and transfers. It is the chief determinant of consumer expenditures. 7. All of these concepts, and others, can be depicted in a circular flow diagram that shows expenditures on all four sources flowing into business firms and national income flowing out. 8. The close relationship between Consumer Spending ( C ) and disposable income ( DI ) is called the consump-tion function. Its slope, which is used to predict the change in consumption that will be caused by a change in income taxes, is called the marginal propensity to consume (MPC). 9. Changes in disposable income move us along a given consumption function. Changes in any of the other variables that affect C shift the entire consumption function. Among the most important of these other variables are total consumer wealth, the price level, and expected future incomes. 10. Because consumers hold so many money-fixed assets , they lose purchasing power when prices rise, which leads them to reduce their spending. 11. The government often tries to manipulate aggregate demand by influencing private consumption decisions, usually through changes in the personal income tax.

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  Economics for Financial Markets

  • Brian Kettell(Author)
  • 2001(Publication Date)
  • Butterworth-Heinemann

    (Publisher)

  Consumer expenditure, investment, government spending and foreign trade 135 Personal income and consumer expenditure Definition Personal income represents the compensation that individuals receive from all sources. That includes wages and salaries, proprietor’s income, income from rents, dividends and trans-fer payments, such as social security, unemployment and welfare benefits. Personal income is important for financial markets as it clearly holds the key to future spending and hence economic activity. Consumer expenditure data also involves data collection from many different sources. Personal consumption expendi-tures include durable goods, non-durable goods and services. Motor vehicles, furniture, appliances, boats and pleasure craft, jewellery, watches and books would be durable goods. Food, clothing, shoes, gasoline and fuel oil would be non-durable goods. The services sector represents roughly half of Consumer Spending. This would include electricity, gas, telephone, domestic services, motor vehicle repairs, insurance, medical care, investment services, beauty parlours, etc. Who publishes it and when? The income and consumption data are prepared monthly by the Commerce Department’s Bureau of Economic Analysis. Given the many different types of income, there is a wide variety of source data. The income and expenditure figures are compiled, edited and eventually released one day after the GNP report, which generally appears in the third week of the month. How should you interpret it? Personal consumer expenditures (PCE) are the ‘C’ portion of the GDP equation C + I + G + (X – IM). Since Consumer Spending is two-thirds of GDP, the financial markets have thus two-thirds of their forecast. The data tend to be relatively stable, given that the service sector spending has 136 Economics for Financial Markets traditionally been less volatile than spending on durable and non-durable goods.

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  Macroeconomics as a Second Language

  • Martha L. Olney(Author)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  Because all three phrases refer to the same sum, we use the term “aggregate demand” in this chapter. Consumption Spending Consumption spending is spending by households for final goods and services. Goods are tangible things you can touch and include both durable goods and nondurable goods. Durable goods are goods that last, on average, 3 years or more: automobiles, furniture, household appliances, and so on. Nondurable goods are those that last, on average, less than 3 years: food, restaurant meals, clothing, shoes, gasoline, and so on. Services are intangibles—things that exist but can’t be touched: housing, household operation, transportation, medical care, and so on. Today, about 10% of consumption spending is for durable goods, about 30% is for nondurable goods, and about 60% is for services. That’s quite a change from the mid-20th century. In 1950, about 16% of consumption spending was for durable goods, about 50% was for nondurable goods, and about 33% was for services. This change occurred steadily, decade-to-decade. Investment Spending Investment spending is spending by businesses—both corporations and unincor- porated businesses—for three things: new equipment, construction, and changes in the value of inventory holding. Economists use the term fixed investment to refer to spending for equipment and on construction. TIP What year is a building included in GDP? What matters is when someone was employed building it. Construction of a structure built in the past was included in investment in the year it was constructed. An Overview of the Four Types of Spending 109 Equipment is also sometimes called producer durable goods and includes com- puters, industrial equipment, transportation equipment, and so on. Construction includes construction of both residential and nonresidential structures. Realtor fees from selling an existing building are also included in construction spending.

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  Macroeconomics

  Principles & Policy

  • William Baumol, Alan Blinder, John Solow, , William Baumol, Alan Blinder, John Solow(Authors)
  • 2019(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Although it is true that income determines consumption, the consumption function in turn helps to determine the level of income. If that sounds like circular reasoning, read the next chapter! Summary 1. Aggregate demand is the total volume of goods and ser- vices purchased by consumers, businesses, government units, and foreigners. It can be expressed as the sum C + I + G + (X – IM), where C is Consumer Spending, I is investment spending, G is government purchases, and X – IM is net exports. 2. Aggregate demand is a schedule: The aggregate quantity demanded depends on (among other things) the price level. But, for any given price level, aggregate demand is a number. 3. Economists reserve the term investment spending to refer to purchases of newly produced factories, machin- ery, software, and houses. 4. Gross domestic product is the total volume of final goods and services produced in the country. 5. National income is the sum of the before-tax wages, interest, rents, and profits earned by all individuals in the economy. By necessity, it must be approximately equal to domestic product. 6. Disposable income is the sum of the incomes of all indi- viduals in the economy after taxes and transfers. It is the chief determinant of consumer expenditures. 7. All of these concepts, and others, can be depicted in a circular flow diagram that shows expenditures on all four sources flowing into business firms and national income flowing out. 8. The close relationship between Consumer Spending (C) and disposable income (DI) is called the consumption function. Its slope, which is used to predict the change in consumption that will be caused by a change in income taxes, is called the marginal propensity to consume (MPC). 9. Changes in disposable income move us along a given consumption function. Changes in any of the other vari- ables that affect C shift the entire consumption function.

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  Macroeconomics

  • William Boyes, Michael Melvin(Authors)
  • 2015(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  9-1e-3 Expectations Another important determinant of consumption is consumer expectations about future income, prices, and wealth. When consumers expect a recession, when they are worried about losing their jobs or facing cutbacks in hours worked, they tend to spend less and save more. This means an autonomous decrease in consumption and an increase in saving, like the shift from C to C 2 and from S to S 2 in Figure 5. Conversely, when consumers are optimistic, we find an autonomous increase in consumption and a decrease in saving, like the shift from C to C 1 and from S to S 1 in Figure 5. Expectations are subjective opinions; they are difficult to observe and measure. This cre-ates problems for economists trying to analyze the effect of expectations on consumption. The Conference Board surveys households to construct its Consumer Confidence Index , a measure of consumer opinion regarding the outlook for the economy. Economists follow the index in order to predict how Consumer Spending will change. Since consumption is the largest compo-nent of GDP, changes in consumption have important implications for business cycles. Clearly the Consumer Confidence Index is not always a reliable indicator of expan-sion or recession. Still, economists’ increasing use of this and other measures to better understand fluctuations in consumption underscores the importance of consumer expecta-tions in the economy (see the Economic Insight “Permanent Income, Life Cycles, and Consumption”). wealth The value of all assets owned by a household. Chapter 9 Aggregate Expenditures 183 Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience.

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  Economic Indicators for Professionals

  Putting the Statistics into Perspective

  • Charles Steindel(Author)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  51 2

  Consumer Spending

  Our examination of the data on the major GDP expenditure components starts with personal consumption. There are misunderstandings and myths about the Consumer Spending numbers. A notable one, though fairly modest, is that most of GDP (the typical fraction is “two-thirds”) consists of Consumer Spending (Morath and Sparshott, 2016). This is misleading on a number of fronts. First, a great deal of Consumer Spending is on imported products, while GDP is a measure of domestic production.1 A more technical concern is that, repeating a point from the last chapter, one cannot actually speak of shares of real GDP. Real GDP is an index number. For convenience and tradition, the index number is usually expressed in terms of the dollars of the base year, but it is technically incorrect, though commonplace, to divide the chained dollar figure reported for a component by the chained dollar figure reported for the total. It is correct, though, to talk about the ratio of current-dollar spending of some GDP component to overall current-dollar GDP, and to talk about the fraction of real GDP growth proximately attributable to growth in a GDP component. On both fronts Consumer Spending looms large, though once again, some of that growth should be corrected for offsetting growth in imports of consumer goods. Figure 2.1 illustrates that nominal Consumer Spending accounts for more than two-thirds of GDP. This share has steadily grown over the last half-century and, even taking into account growth in imports, reinforces the notion that US economic activity and production is increasingly geared toward the consumer. Similarly, Figure 2.2

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  Personal Finance

  • George Callaghan, Ian Fribbance, Martin Higginson(Authors)
  • 2011(Publication Date)
  • Red Globe Press

    (Publisher)

  Chapter 3 Expenditure and budgeting Martin Higginson Contents 1 Introduction 88 2 Economic influences on expenditure 88 3 Symbolic consumption, marketing and advertising 92 3.1 Symbolic consumption 92 3.2 Marketing and advertising 97 4 Budgeting 99 5 Couples, budgeting and the management of money 115 5.1 Economies of scale 115 5.2 Budgeting and managing money 119 6 Children and budgeting 121 7 Conclusion 126 References 127 1 Introduction In today’ s society there are many opportunities to spend money: goods and services can be bought online, from catalogues, through the TV, and from shopping malls which provide whole shopping experiences. Advertising continually tempts people to spend money – whether it’ s money they already have, or money they can borrow. Spending provides the way to obtain the essentials of life such as food and accommodation. But the reasons for spending can go far beyond such practical or functional uses. Living in the twenty-first century UK involves being part of a ‘consumer society’ where spending money has become a leisure activity in its own right. Opinions are often formed about people based on what they buy and the possessions they own. Spending can be a means to signal who we are, and it forms an integral part of the way in which people relate to one other. You saw in Chapters 1 and 2 that not all spending in the economy is done by households: the government spends money on goods and services, which then directly impact on the quality of everyone’ s lives – this spending is paid for by taxes, which in turn are another call on household incomes. At household level, we tend to keep spending more. Indeed, real average weekly household expenditure has increased markedly throughout the past thirty years, to stand at £459.20 in 2007 (ONS, 2009). Choices about spending levels are crucial because they affect household finances directly.

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  Principles of Economics 2e

  • Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
  • 2017(Publication Date)
  • Openstax

    (Publisher)

  6 | Consumer Choices Figure 6.1 Investment Choices We generally view higher education as a good investment, if one can afford it, regardless of the state of the economy. (Credit: modification of work by Jason Bache/Flickr Creative Commons) "Eeny, Meeny, Miney, Moe"—Making Choices The 2008–2009 Great Recession touched families around the globe. In too many countries, workers found themselves out of a job. In developed countries, unemployment compensation provided a safety net, but families still saw a marked decrease in disposable income and had to make tough spending decisions. Of course, non-essential, discretionary spending was the first to go. Even so, there was one particular category that saw a universal increase in spending world-wide during that time—an 18% uptick in the United States, specifically. You might guess that consumers began eating more meals at home, increasing grocery store spending; however, the Bureau of Labor Statistics’ Consumer Expenditure Survey, which tracks U.S. food spending over time, showed “real total food spending by U.S. households declined five percent between 2006 and 2009.” So, it was not groceries. What product would people around the world demand more of during tough economic times, and more importantly, why? (Find out at chapter’s end.) That question leads us to this chapter’s topic—analyzing how consumers make choices. For most consumers, using “eeny, meeny, miney, moe” is not how they make decisions. Their decision-making processes have been educated far beyond a children’s rhyme. Introduction to Consumer Choices In this chapter, you will learn about: Chapter 6 | Consumer Choices 133 • Consumption Choices • How Changes in Income and Prices Affect Consumption Choices • How Consumer Choices Might Not Always be Rational Microeconomics seeks to understand the behavior of individual economic agents such as individuals and businesses.

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