Consumption Times Three

• Consumption: This is the generic term for the use of goods and services to satisfy wants and needs. This activity may or may not involve actual purchases or expenditures. Consumption is the fundamental process in the economy that addresses the scarcity problem. It is, in effect, the ultimate goal of economic activity.


• Consumption Expenditures: This is the more specific term referring to actual expenditures on final goods and services, or gross domestic product, by the household sector. Some consumption does not involve consumption expenditures and some consumption expenditures do not necessarily result in actual consumption.


• Personal Consumption Expenditures: This is the official measure of the consumption expenditures component of aggregate expenditures used in the calculation of gross domestic product. While the official number-crunchers try to measure ALL consumption expenditures, some are missed by the official calculation.

Three Consumption Categories

• Durable goods are the tangible goods purchased by consumers that tend to last for more than a year. Common examples are cars, furniture, and appliances. The two most important subcategories of durable goods in the National Income and Product Accounts are "motor vehicles and parts" and "furniture and other household equipment." Durable goods purchases are usually about 10 to 15 percent of personal consumption expenditures. This percentage tends to be at the low end during business-cycle contractions and at the high end during business-cycle expansions.


• Nondurable goods are the tangible goods purchased by consumers that tend to last for less than a year. Common examples are food, clothing, and gasoline. In fact, the three most important subcategories of nondurable goods in the National Income and Product Accounts are listed as "food," "clothing and shoes," and "gasoline and oil." Nondurable goods purchases are usually about 25 to 30 percent of personal consumption expenditures.


• Services are activities that provide direct satisfaction of wants and needs without the production of tangible goods. Common examples are information, entertainment, and education. The four primary subcategories of services in the National Income and Product Accounts are "housing," "household operation," "transportation," and "medical care." Expenditures on services are the largest of the three consumption categories, coming in at about 55 to 60 percent of personal consumption expenditures.

Three More Expenditures

• Gross Private Domestic Investment: The official measure of investment expenditures on gross domestic product by the business sector. Gross private domestic investment averages about 15 percent of gross domestic product. These expenditures come in two broad categories: (1) fixed investment and (2) changes in private inventories.


• Government Consumption Expenditures and Gross Investment: The official measure of government purchases for gross domestic product by the government sector. Government consumption expenditures and gross investment also average about 15 percent of gross domestic product. These purchases are divided into two groups: (1) federal and (2) state and local.


• Net Exports of Goods and Services: The official measure of net exports of gross domestic product by the foreign sector, which is the difference between exports and imports. Net exports of goods and services average about 2 percent of gross domestic product, with exports and imports individually in the range of about 10 percent.