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What Is the Relationship Between GDP and Consumption?

One category of consumption involves perishable goods.
The purchasing of durable goods, like furniture, can indicate the health of the economy.
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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 03 August 2014
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Gross Domestic Product (GDP) and consumption are related in the sense that even though GDP is calculated using several measures, consumption is the single most important component. Other details used to calculate the GDP of a nation include government expenditure and consumption and net imports. Consumption often makes up more than 50 percent of the GDP calculations of most nations. In some places, consumption makes up more than 70 percent of the GDP calculations.

Some countries actually consider consumption to be the main statistic on which to rely when calculating the GDP. The main relationship between GDP and consumption is the fact that a rise in the level of consumption translates to a corresponding rise in the level of the GDP. Consumption may be divided into several categories. The consumption of nondurable goods refers to the consumption of perishable goods or other goods that last generally last less than three years. The consumption of durable goods refers to nonperishable goods and goods that last for a period exceeding three years. Consumption of services refers to the consumption of services like electricity, cable and other types of resources.

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GDP and consumption are also related in the sense that changes in the GDP can lead to changes in interest rates and also changes in exchange rates. The relationship between GDP and consumption means that any undue changes in the level of consumption either way can lead to a rise or fall in the GDP. A rise in the GDP could be a signal of strong economic growth and increased consumer confidence. A decrease in the level of the GDP could indicate a downturn in the market caused by a decrease in demand for goods and services.

Another way in which GDP and consumption are related is in the sense that the consumer demand and consumption of goods is the chief component and driving factor behind a business cycle. A business cycle refers to the aggregate of the demand and the consumption for finished goods within a delineated period. The business cycle does not take into consideration the demand for raw materials twice; it only calculates the end product that is manufactured using the raw material. The only time that the raw material is included in the business cycle is if the raw material was not used for production within the business cycle under review. For instance, if cookies were produced during the business cycle, the flour, sugar and other ingredients used in baking them will not be included as well as the cookies. The business cycle and the real GDP are used to calculate the growth of the economy.

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