GDP Explained Part 1 – Consumption
Have you ever wondered what really makes up Gross Domestic Product (GDP) or what it is? The government is not the only group who contributes to GDP. Gross Domestic Product is the market value of all the final goods and services produced annually. It is one way to measure economic total output and health.
Gross Domestic Product is composed of total expenditures. Total expenditures are the sum of four parts: Consumption, Investments, Government Purchases and Net Exports. Stay tuned for future blogs about investments, government purchases and net exports.
Consumption: Spend! We do this every day. It can be fun! Consumption is the sum of goods and services a household consumes. It makes up a whopping 70% of the total GDP. Thus, consumption is the biggest contributor. Three factors affect it.
1- Wealth: Money$$ – One’s wealth is made up of their assets they own out right and their savings. When household wealth increases consumption generally increases. With more money to spend purchases are made beyond necessities. When wealth decreases consumers cut back.
2- Interest Rates: When interest rates decrease people tend to consume more durable goods. Durable goods are cars, boats, houses, etc. Finance rates at 3% vs. 10% make a huge difference. Interest rates and rate policy can enhance or inhibit consumption. They also impact liquid savings returns.
3- Taxes: After taxes are paid we are left with disposable income. Taxes are direct and indirect. A decrease in taxes or tax rates provides more disposable income for consumption. When taxes increase we have less disposable income. So, in turn we consume and spend less.
Simply put, emotion and how we feel about these criteria have much to do with overall consumption. We consume when the price is right and save when it’s not. Attitudes as well as economic realities intermingle and impact consumption.