What Is Consumption


Consumption, defined as expenditure for acquisition of personal utility, is an important concept in economics and also is extensively studied in many other disciplines. It is much like production, since the value of production is determined by the number of inputs available, and consumption, on the other hand, is the value of total expenditure less the value of production. More simply stated, consumption is what makes money circulate. Like production, it can be viewed as the result of a process. The process, of course, being the process of making money.

There are two concepts that guide the evaluation of how well consumption is progressing along with overall economic activity. First, the level of investment and second, the level of consumption. The investment component of the equation is often referred to as capacity utilization. When investment is growing at a pace that is sufficient to keep up with population growth, profit from the investment is not lost, meaning that over time, the economy grows at a level that allows for both investment and consumption to meet at or near their theoretical maximum. On the flip side, when the level of consumption is growing faster than the level of investment, then profit is lost, meaning that the economy becomes less robust and growth slows. Thus, in assessing the condition of the economy, one sees the indicators of consumption smoothing as a positive phenomenon.

How do we determine the condition of the economy? The primary and most common measure of the condition of the economy is gross domestic product (GDP). GDP, however, only measures the value of goods and services produced within the domestic economy. It does not measure the value of the total output of the international market, nor does it include the value of goods and services imported into the domestic economy. The concept of what is consumption can be best explained by viewing it as the sum of all value added output that has been produced within the domestic economy.

In assessing the condition of the economy, another concept that should be considered is the extent to which economic activity supports the creation of new goods and services. This concept is closely related to the concept of what is consumption. The extent to which economic activity supports the generation of new goods and services determines both the level of production of those goods and the amount of new consumption that will be created in the economy. Economic analysts use both concepts in order to assess the health of an economy.

What is consumption smoothing when it comes to the operation of the economy? When the level of overall spending by households and businesses falls below the level that is needed to support their reproduction of necessary goods and services, there is what is consumption smoothing. At this point, the economy is said to be in a condition of deficiency. When, over time, overall spending again recovers to the level needed to provide for reproduction, then the economy is said to be in a situation of excess.

Now let’s consider the three categories of goods and services and what they are. Overall consumption spending refers to all the activity that is not durable or that produces non-tangible goods and services. In contrast, durable goods and services are produced with tangible items. In addition, in the category of non-tangible goods and services, total consumption spending includes the spending on energy, land, and building materials. The three categories of consumption spending are what is consumption, what is investment, and what is savings.

What is investment when it comes to the operations of the business sector? Investment includes both direct and indirect purchases of goods and services. In addition, it includes government purchases such as purchases of goods and services made by the government. The government can purchase goods and services in the form of government purchases, retained earnings, and goods and services acquired through the process of trading. Government purchases account for about two-thirds of the total GDP (Gross Domestic Product).

Lastly, what is consumption spending is the process of reducing the domestic output of the economy by any means necessary in order to make the domestic system of production more conducive to economic recovery. Reducing consumption spending reduces national income, which in turn reduces the demand for investment. Economic recovery is an ongoing process that takes time; therefore, reducing the level of consumption spending now will have a negative effect on the future performance of the economy. As such, it is important to examine carefully how changes in consumption spending affect the process of economic recovery.