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Country Consumption

By: EconomyWatch Date: 30 June 2010

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Country consumption is the aggregate of all final purchases in a nation from domestic and external sources. Some economists define consumption as the sum of all economic activities that do not come under the purview of production and marketing.

Country consumption is measured using different metrics, such as energy, water and food.

Country Consumption Function

The consumption function helps to calculate the total consumption in a country. The components of a country’s consumption function are:

Induced consumption: This is that portion of consumption that is directly influenced by the income level in the economy.

Autonomous consumption: This includes that portion of consumption that remains constant, irrespective of an increase or decrease in the income levels.

The consumption function of a country can be represented as:

C = a + iYd

Where,

C = total consumption in the country

a = autonomous consumption (a > 0)

i =induced consumption (marginal propensity to consume) (0 < i < 1)

Yd = disposable income

Factors Affecting Country Consumption

The consumption levels in a country are affected by various factors, such as:

Prices: High prices result in a decrease in the purchasing power of individuals. This lowers the country’s total consumption.

Inflation expectations: If the inflation rate of a country is expected to increase in the near future, current consumption levels spike. This is because people purchase (and store) more to avoid paying higher prices. The opposite happens when inflation is projected to decrease.

Taxes: Higher taxes reduce the disposable income of individuals. This subsequently reduces individual and national consumption.

Country Consumption Data

According to the World Bank Development, the aggregate consumption share of different income groups in 2005 was:

High-income group (rich): accounted for just 20% of the total world population. However, the consumption level of this group was the highest at 76.6%.

Middle-income group (working class): accounted for 60% of the global population, with a consumption percentage of 21.9%.

Low-income group (poor): included 20% of the world population and constituted a meager 1.5% of the total consumption.

The consumption behavior of individuals varies from country to country. In developed nations, such as the US and the UK, the consumption of luxury goods is higher. On the other hand, in under-developed nations such as Malawi and Somalia, the total consumption expenditure is mainly on sustenance (basic goods like food and clothing). In developing countries like China and India, there is a rapid increase in the overall standard of living. This influences the consumption patterns, which consists of both sustenance and luxury goods.