Private consumption is divided into three categories: Durable goods that are defined as goods with a lifetime greater than three years, services that include travel and car repairs, and non-durable goods such as food and water that can be immediately consumed. The remaining one-third consists of government expenditure and net exports. Consumption thus helps determine the income and output in an economy.Ĭonsumption expenditure in the private sector accounts for two-thirds of the Gross Domestic Product (GDP). A decrease in production means businesses will lay off workers, resulting in unemployment.
Keynesian theory states that if consuming goods and services does not increase the demand for such goods and services, it leads to a fall in production.
Income and employment theoryĬonsumption plays an important role in the income and employment theory under Keynesian economics as put forth by John Maynard Keynes. It also provides the government with insight into the saving to spending ratio in the economy. It also helps the government make decisions on the production of essential and non-essential commodities in a country. The minimum wage rate and tax rate are determined based on the habits of individuals. Government theoriesĬonsumption habits also help the government formulate theories. These theories help analysts understand how individual behavior affects the input and output in the economy. The study of consumption theory has helped economists formulate numerous theories such as the Law of Demand, the Consumer Surplus concept, and the Law of Diminishing Marginal Utility. Consumption drives productionĪccording to economist Adam Smith, “Consumption is the sole purpose of all production.” It means that the production of goods and services is dependent on the level of consumption. Once it is made, the food is consumed, resulting in the end of an economic activity. If, for example, a person desires a sandwich, they will take the effort to make the sandwich. The result of such an effort is consumption, which also means the satisfaction of human wants. If a person desires something, he will take action to satisfy this desire. The beginning of all economic activityĬonsumption is the start of all human economic activity. Modern economists give a lot of importance to the level of consumption in the economy because it characterizes the economic system the country currently operates in. Data from households allows macroeconomists to understand spending behavior, and the figures can be used to examine relationships between consumption and factors such as unemployment and education costs. The behavior data can be used to measure poverty, understand the retirement rate in households, and test theories of competition in the economy. The total output can be used to understand the reasons for macroeconomic fluctuations in the business cycle. Secondly, consumption behavior provides a good measure of the total national output in the economy. Therefore, it can be used to assess the long-term productive capacity of an economy. Aggregate savings in the economy feeds into the national supply of capital. The first is to assess aggregate savings in each household savings refer to the portion of income that is not used for consuming goods and services.
Macroeconomists use this economic measure for two reasons. Neoclassical economists view consumption as the final purpose of an economic activity, hence, the per person value is an important factor in determining the productive success in an economy. It is an important step, as it helps the analyst with the assumption section of the financial model. When valuing a business, a financial analyst would look at the consumption trends in the business’ industry. Consumption is defined as the use of goods and services by a household. It is a component in the calculation of the Gross Domestic Product (GDP). Macroeconomists typically use consumption as a proxy of the overall economy.
0 kommentar(er)
