Consumer spending

Consumer spending, consumer demand, consumption, or consumption expenditure is the purchasing of goods and services by individuals or families. It is the largest part of aggregate demand at the macroeconomic level. There are two components of consumption in the basic model: induced consumption (which is affected by the level of income) and autonomous consumption (which is not).

Taxes are a tool in the adjustment of the economy. Tax policies designed by governments affect consumer groups, net consumer spending and consumer confidence. Economists expect tax manipulation to increase or decrease consumer spending, though the precise impact of specific manipulations are often the subject of controversy.

Underlying tax manipulation as a stimulant or suppression of consumer spending is an equation for Gross Domestic Product (GDP). The equation is GDP = C + I + G + NX, where (GDP) is the value of all final goods and services provided in the economy, (C) is private consumption, (I) is private investment, (G) is government and (NX) is the net of exports minus imports. Increases in government spending create demand and economic expansion. Government spending increases may translate to tax increases or deficit spending. Thus, these expansions cannot be done without a potential negative impact on private consumption (C) or one of the other two elements, investment(I) or the net of exports and imports(NX).

Consumer sentiments are the attitudes of households and other entities toward the economy and the health of the fiscal markets, and they are a strong constituent of consumer spending. Sentiments have a powerful ability to cause fluctuations in the economy, because if the attitude of the consumer regarding the state of the economy is bad, then they will be reluctant to spend. Therefore, sentiments prove to be a powerful predictor of the economy, because when people have faith in the economy or in what they believe will soon occur, they will spend and invest in confidence. However sentiments do not always affect the spending habits of some people as much as they do for others. For example, some households set their spending strictly off of their income, so that their income closely equals, or nearly equals their consumption (including savings). Others rely on their sentiments to dictate how they spend their income and such.

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