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Lecture 15

ECON 2400 Lecture 15: Lesson 15

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ECON 2400
prof Antone

Lesson 15 The Components of Aggregate Expenditure Typically, particularly in constructing economic models to understand how the economy works, we are interested mainly in the expenditure side of the NIPA. Here, we consider each of the expenditure components in more detail. Consumption Consumption expenditures are the largest expenditure component of GDP, accounting for 71.1 of GDP in 2011. Consumption is expenditure on consumer goods and services during the current period, and the components of consumption are durable goods, nondurable goods, and services. Durable goods include items like new automobiles, appliances, and furniture. Nondurables include food and clothing. Services are nontangible items like haircuts and hotel stays. Clearly, the division between durables and nondurables is somewhat imprecise because, for example, shoes (a nondurable) could be viewed as being as durable as washing machines (a durable). Further, some items included in consumption are clearly not consumed within the period. For example, if the period is one year, an automobile may provide services to the buyer for ten years or more, and is, therefore, not a consumption good but might economically be more appropriately considered investment expenditure when it is bought. The purchase of a used car or other used durable good is not included in GDP, but the services provided (e.g., by a dealer) in selling a used car would be included. Investment is expenditure on goods that are produced during the current period, but are not consumed during the current period. There are two types of investment: fixed investment and inventory investment. Fixed investment is production of capital, such as plant, equipment, and housing, and inventory investment consists of goods that are essentially put into storage. The components of fixed investment are nonresidential investment and residential investment. Nonresidential investment adds to the plant, equipment, and software that make up the capital stock for producing goods and services. Residential investmenthousingis also productive, in that it produces housing services. Though investment is a much smaller fraction of GDP than is consumption, investment plays a very important role in business cycles.
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