Major Components of the Economy
Economics 104B - Lecture Notes - Professor Fazzari
Topic IV: Major Components of the Economy
(Final Update March 28, 2011)
A. Consumption: Source of Demand – Determinant of Saving
1. Consumption Statistics
a) Consumer spending constitutes largest portion of sales
• Consumption is the largest part of aggregate demand. In consists of everything bought by household except new houses (these are counted as residential investment).
• Consumption can be divided up into "durable" and "non-durable" categories. Durables include longer-lasting goods like cars and appliances. Non-durables include food and clothing and many services. But usually we refer to consumption as a whole.
b) Trends in shares of consumption in total output
• The share of consumption in demand has risen from about 64 percent in the 1950s to about 71 percent in recent years (detailed statistics were presented in class).
• This increase in the consumption share has been a source of strength for U.S. aggregate demand. On the demand side, high consumption lead to high sales and high output. Thus, strong consumption in the U.S. could have explained the relatively good performance of the U.S. economy relative to other major economies (especially Japan and Germany) that have weaker consumption spending.
• Note that high consumption implies low saving, because if consumers spend their money on goods and services they cannot save it. Along with its high consumption, the U.S. has a low saving rate. Some people worry that low saving will hurt the economy. This is a supply-side argument: if saving is low fewer resources are available for capital accumulation, which reduces the long-run capital resources in the economy and lowers Y*.
• Therefore, there is a direct contradiction between the demand-side and supply-side perspectives on consumption and saving. A simple resolution of this paradox is that high consumption generates demand-side
Topic IV: Major Components of the Economy
(Final Update March 28, 2011)
A. Consumption: Source of Demand – Determinant of Saving
1. Consumption Statistics
a) Consumer spending constitutes largest portion of sales
• Consumption is the largest part of aggregate demand. In consists of everything bought by household except new houses (these are counted as residential investment).
• Consumption can be divided up into "durable" and "non-durable" categories. Durables include longer-lasting goods like cars and appliances. Non-durables include food and clothing and many services. But usually we refer to consumption as a whole.
b) Trends in shares of consumption in total output
• The share of consumption in demand has risen from about 64 percent in the 1950s to about 71 percent in recent years (detailed statistics were presented in class).
• This increase in the consumption share has been a source of strength for U.S. aggregate demand. On the demand side, high consumption lead to high sales and high output. Thus, strong consumption in the U.S. could have explained the relatively good performance of the U.S. economy relative to other major economies (especially Japan and Germany) that have weaker consumption spending.
• Note that high consumption implies low saving, because if consumers spend their money on goods and services they cannot save it. Along with its high consumption, the U.S. has a low saving rate. Some people worry that low saving will hurt the economy. This is a supply-side argument: if saving is low fewer resources are available for capital accumulation, which reduces the long-run capital resources in the economy and lowers Y*.
• Therefore, there is a direct contradiction between the demand-side and supply-side perspectives on consumption and saving. A simple resolution of this paradox is that high consumption generates demand-side