Consumption Expenditure- Meaning and its components

Consumption Expenditure- Meaning and its components

Consumption expenditure refers to the aggregate expenditure incurred by all the consumers including households, government, and non-profit organizations.

What is the Consumption Expenditure?

It is the aggregate of expenditure or money spent by the households, by Government, and non-profit organizations. In other words, it refers to the aggregate consumption expenditure in the economy.

Components of consumption expenditure:

The components include the consumption expenditure by:

  1. Households
  2. Government
  3. Non profit organisations 

Expenditure by households:

Households expenditure consists of expenditure incurred or money spent by household residents of a country on goods and services that they use to meet their needs and wants. Here, the goods and services include all the private purchases of durable, non-durable goods and services. In addition to it, It also includes the imputed expenditure such as imputed rent of self-owned house. In other words, this expenditure typically refers to the spending on consumption by households in an economy.

Components of Households expenditure: 

  1. Purchases of goods and services required for daily needs i.e. clothes, food, and personal services.
  2. Partial payment for the goods and services provided by the government i.e. ticket for public museums.
  3. Payment to govt for permits i.e. license and fees for issuing passports
  4. Imputed expenditure i.e. rent on a self-occupied house.
  5. Income earned by public sector employees i.e. special services provided such as free or cheaper tickets to railway employees

Government Expenditure:

The money spent by the government on the distribution of goods to households is known as government expenditure. For example, the expenditure on distribution of consumer goods for defence forces, on mid day meals in government meals, and such other purposes. In other words, it is the aggregate amount spent by the government on goods and services for the general public. Here, the goods and services that are used for the direct satisfaction of individual or collective needs of all the members of the economy are included.

Expenditure by Non-profit organizations:

The amount spent by non-profit organizations or institutions on consumer goods for charity purposes is known as expenditure by non-profit institutions. Here, the non-profit organizations refer to NGOs, Gurudwaras, temples, mosques, and others. Also, it includes the expenditure incurred on purchases from private enterprises as well as government institutions. 

Components:

  1. Expenses incurred on providing services on behalf of households such as hospital care and education
  2. expenditures incurred by third-party payers on behalf of households such as employer-paid health insurance and medical care financed through the government programs.

If we add the expenditure incurred on consumer goods by households, government, and non-profit organizations, we will get the total consumption expenditure in the economy. Therefore, 

Aggregate Consumption Expenditure = Consumption expenditure by (households +  Government + non profit organisations)

Thus, we can say that these three parties are the final users of consumer goods in the economy. Any expenditure incurred by these users on the purchase of consumer goods would be added to total consumption expenditure.

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References:

Introductory Microeconomics – Class 11 – CBSE (2020-21)

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