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Components of consumer spending

Components of consumer spending Gross Domestic Product (GDP) is the final value of all goods and services produced domestically in a year, minus any trade deficit. It can also be interpreted as the sum of the total spending of its component parts. There are several components of GDP, and those include Consumer Spending (C), commercial and residential Investment Spending, Government Spending, and Net Exports (value of all exports minus the value of all imports). The largest component of GDP is Consumer Spending, totaling about 6.255 trillion dollars in 1999, or sixty seven percent (67%) of GDP. Like GDP, Consumer Spending (here after C) is also determined by several component parts. C is the sum of consumer spending on Durable Goods (DG: goods that can be stores and have an average service life of three years), Non-Durable Goods (NDG: storable goods with service life of less than three years.), and Services Spending (S: commodities that cannot be stored and must be consumed at the time of purchase). This paper will deal exclusively with the C component of GDP, and more specifically with the components of C and their changes from 1959 until 1999. I choose to use Nominal GDP for my analysis because the actual dollar values are less important than the changes in the proportions of the components relative to GDP. All of the data used in this paper came from, or was derived from the Economic Report of the President (February 2000), Appendix B, prepared by the Counsel of Economic Advisors (available online at *http://w3.access.gpo.gov/usbudget/fy2001/erp.html#erp4*). In the period from 1959 until 1999, Consumption (C) increased from approximately 63% of GDP to about 68%, with an overall increase of about 7.88%. However, the proportions of the components of C, namely Durable goods spending (DG), Non-Durable goods spending (NDG), and Services spending (S), do not seem to move in a corresponding way. Of the three components, NDG suffered a dramatic loss as a share of GDP (-31.98%), DG remained nearly the same (-2.6%), and S increased by nearly 58%. I will treat each of these components separately in a discussion of some of the underlying reasons for their relative changes. Of the three components of Consumer spending, Durable goods spending has changed the least. In 1959 about 8.42% of GDP was spent on DG, while in 1999 DG comprised 8.2% of GDP. This is not surprising if one makes the valid assumption that the demand for durable goods is less elastic than the other components of C. For example, a rational person will not buy more than one washing machine every six years or so, even if their relative income has increased, or if the price of washers decreases. Even if they were inclined to replace a durable good before its service life ended, most people would not consider owning more than one washing machine at a time, or having more than one car per driver. Another reason that DG spending (relative to GDP) does not seem to change is that there have been significant increases in the way that durable goods are manufactured. Advancements in technology and quality control procedures allow manufactures to produce higher quality goods with longer service lives, which consequently need less frequent replacement. Also global competition has forced American manufactures to produce higher quality goods at more competitive prices. Consumer spending on Non-Durable Goods (NDG), relative to GDP, has fallen sharply from 29.27% of GDP in 1959 to 19.91% of GDP in 1999. I’m not sure what caused this decrease, but I have some ideas. First, increases in manufacturing quality have improved the service life of most every product, from tennis shoes to light bulbs. Secondly, many low dollar items are no longer made domestically, in favor of foreign factories with lower operating costs, cheaper labor, and relaxed (if existent) environmental policies. Some of the components of NDG, like food spending, are relatively inelastic, while others, like purchases of expensive designer clothing, are highly elastic with regard to personal income. It is difficult to point to one reason why spending on NDG has decreased so much relative to GDP. The most noticeable change of the three components of C is that of Service Spending (S). In 1959, S made up 25.3% of GDP, while in 1999 S comprised 39.53% of GDP. There are probably dozens of reasons for this increase, but I shall try to explore several possible explanations. One of the main components of S is medical expense. In 1999, the CPI for Medical Services was 250.6 (for urban consumers, 1982-84 = 100). This implies that the average cost of medical care is two and-a-half times higher than it was only six to eight years ago. That fact coupled with the fact that more Americans have health insurance now than in the past begins to account for the rise in S relative to GDP. Also, there are more senior citizens alive now than ever before, and those seniors require more medical care, and they need it more frequently. Medicine is also seemingly adversely affected by technology in the sense that in other industries, technology makes it ultimately less expensive to produce, whereas in medicine, technology makes treatment more effective, but also more expensive. All of these facts are compounded because the demand for medical care is both high and inelastic. Medicine isn’t the only market that has seen substantial price increases. The CPI for entertainment (movies, concerts, sporting events) in 1997 was 162.5 (1982-83 = 100). It is not surprising that Americans would be spending more money on the least tangible of purchases when one considers that real income has increased from $9,068 in 1959 to $23,310 in 1999 (Chained 1996 dollars). This real increase in income has had a direct effect on Consumer consumption relative to GDP. Since Americans are making more money than ever before (in aggregate), it makes sense that they will spend more money. Judging by the past, incomes will continue to rise which leads consumers to spend more now and save less, which in the short run increases output and therefore income, but in the medium to long run will cause slower accumulation of capital and therefore slower growth of output and income. Bibliography:

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