There is talk of private consumption when it comes to referring to the expenditure made by organizations, companies, families and individuals in a given period of time and in order to meet their needs in the form of different goods and services in the market.
Private consumption is an especially important variable in the macroeconomic study and measures the total value in a period of goods and services that households, companies or private institutions acquire within their corresponding economic activities.
At the same time, the definition of consumption itself establishes that this expense is made in final goods and not in those aimed at the production of others (which could be considered as investment, for example).
Together with public consumption, it constitutes the total expenditure of a country. Depending on the proportion existing between private and public consumption, it is possible to acquire a certain image about the interventionist nature or not of a particular economy, being much more interventionist the lower the private consumption, and vice versa.
Within the aggregate demand of a nation, private consumption is usually the component or variable of greatest importance and size, especially if the country is considered as developed or advanced. We can see it in the calculation formula of gross domestic product (GDP) .
GDP = C + I + G + X – M
C being private consumption, I investment, G public spending, X exports and M imports .
It is necessary to make a distinction between private internal consumption and national private consumption. Thus, depending on the origin of the goods or services demanded, we would face one or the other.
Internal consumption includes those goods produced in the same country (whatever the nationality of the consumer). Meanwhile, national consumption is made by residents of the country, regardless of the origin of the good.
Main components of private consumption
The main components of private consumption are:
- Income available. Directly related to final consumption. Thus, the higher the income available, the greater the possibilities of consumption for companies or families.
- Permanent income. It is a kind of average expenditure or consumption made by a household or a commercial company within a normal period of economic activity. That is, possible unforeseen expenses are not taken into account.
- Life cycle hypothesis. It is usually considered that there is a behavior by which individuals undertake saving actions for the future. This supposes a control in the current or present consumption with anticipation to realize it in the future.
- Wealth-effect. This aspect indicates that the income obtained through wages over a period of time is not decisive at the time of consumption, since those riches already possessed or obtained previously are also taken into account.
There are other variables that have a significant influence on people’s behavior in terms of their consumption decisions. We refer, for example, to the economic forecasts, inflationary expectations, employment data of your country or the financing possibilities that can be accessed (especially if the good to be acquired is of high value). That is, trust is a key element for private consumption.