What is Consumption?

Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “Consumption”

Consumption is the value of goods and services bought by people. Individual buying acts are aggregated over time and space. Consumption is normally the largest GDP component. Many persons judge the economic performance of their country mainly in terms of consumption level and dynamics.
People in different position in respect to income have systematically different structures of consumption. The rich spend more for each chapter in absolute terms, but they spend a lower percentage in income for food and other basic needs. The percentage values of an aggregation over all the households in a country can thus be used for judging income distribution and the development level of the society.
The rich have both higher levels of consumption and savings. In differentiated product markets, the rich can usually buy better goods than the poor. This happens also because they tend to use different decision making rules. In certain conditions, the poor can pay more than the rich to satisfy the same need. In other words, consumption depends on social groups and their behaviors, as well as their proneness to advertising.
Third, one should distinguish "consumption" as use of goods and services from "consumption expenditure" as buying acts. For durable goods this difference is very relevant, since they are used for long time periods.
Fourth, only newly produced goods enter into the definition of consumption, whereas the purchase of, say, an old house is not considered consumption in macroeconomics, since it was already counted in the GDP of the year in which it was built. Needless to say, for the consumer, both old and new goods provide some need satisfaction.

By Barry Norman, Investors Trading Academy - ITA