Private consumption
This is also called personal consumption or consumer expenditure. Consumer expenditure is personal (mainly household) spending on goods and services. Thus it includes imputed rents on owner-occupied dwellings; and administrative costs of life assurance and pension funds. It excludes interest payments; the purchase of land and buildings; transfers abroad; all business expenditure; and spending on second-hand goods, which reflects a transfer of ownership rather than new production.
Strictly speaking, expenditure takes place when goods are purchased, while consumption may take place over several years. For example, the benefit derived from a car or television is enjoyed (consumed) over several years. In practice it is hard to measure consumption and the term is used loosely to mean expenditure. Thus consumer expenditure, personal expenditure and private consumption are all the same thing.
Spending by consumers accounts for between half and two-thirds of GDP in most countries. Hence a 1% rise in consumer expenditure contributes to around a 0.6% increase in total GDP all else being equal, which it rarely is of course. In particular some of the extra consumer spending will go into higher imports.
Major influences on the level of consumption include the following.
- Incomes. In general higher personal incomes allow more spending.
- Price expectations. Experience shows that consumers tend to save more (and spend less) during periods of high inflation. They may bring spending forward, however, if they expect a one-off increase in prices because of inflation or higher indirect (sales) taxes.
- Interest rates. Higher interest rates push up the cost of existing loans and discourage borrowing and, perhaps, encourage savings, all of which depress spending. Nevertheless higher interest rates also redistribute income from young mortgage payers to their elders whose deposits are greater than their borrowings and who may spend their additional interest income.
- Consumer credit. Easier consumer credit may encourage borrowing, which translates directly into higher spending.
- Wealth. A rise in asset values, such as share or house prices, may make consumers feel wealthier and inclined to spend more.
- Stock level and price of durables. Consumers tend to regard durables such as cars and electrical appliances as wealth. A sudden end to a period of restricted supply of durables as in eastern Germany in 1990, or a fall in their prices, may encourage a temporary consumer boom. This may set up replacement cycles, with bouts of spending on durables every few years.
- Social factors. These may encourage saving to allow bequests or retirement spending.
Related topics:
Government
Distinguishing between consumption and investment