Definition: Consumer spending represents the total amount of private consumption of a household during a specified period, usually a year.
What Does Consumer Spending Mean?
What is the definition of consumer spending? Consumer spending includes all the voluntary purchases of goods and services that a household or an individual makes. When measured on the level of an economy, consumer consumption represents the aggregate level of private consumption, which, ideally, should be equal to the aggregate level of economic output.
The main determinants of consumer spending are the disposable income and the household debt. A household with a high debt cannot spend as much as a household with a lower debt. Similarly, a low disposable income restrains the consumption of goods and services. Other determinants include the interest rates, which affect the disposable income, consumer confidence, which indicates the sentiment of consumers about the economy, and the supply of credit.
Let’s look at an example.
Example
Dorothy works as a secretary at an insurance company. She earns $800 twice a month, and she lives on her own. Over the last two months, she noticed that the $1,600 she earns from her job are not enough to make a decent living. So, she decided to write down what she actually spends and see if she could cut back on spending.
After writing down her actual expenses, Dorothy realizes that she spends $1,250 per month on household and personal needs. In fact, $1,250 is 78% of her monthly salary. She also realizes that she could cut back spending on grocery shopping, eating out, housing expenses and entertainment. So, she creates a new budget with the expected spending she will make in the coming months.
If Dorothy represents the consumption of the average American, then based on her disposable income, consumer confidence, and the broader macroeconomic environment, she will spend more or less money. On a national scale, this represents the total consumer consumption in the United States.
Summary Definition
Define Consumer Spending: CS means to total amount of goods and services consumed by consumers during a period.
