Consumer Spending Essay example

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Consumer Spending

ECO 2301
Principles of Macroeconomics
Anthony Le

November 30th, 2011

Consumer Spending Consumer spending is defined as “the goods and services bought by the households in the satisfaction of their wants and needs.” (BusinessDictionary.com). It is also known as personal consumption expenditure and is the largest part of aggregate demand or effective demand at the macroeconomic level. Why is consumer spending important in the U.S. economy? In fact, consumer spending is the single biggest determinant of the U.S. economy’s health, accounting for about two-thirds of the United States’ annual Gross Domestic Product (GDP). A decline in consumer spending could spoil the U.S. economy or certain market sectors. By
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This leaves less money to pay for discretionary purchases that help fuel economic growth. It is estimated that every $1 increase in the price of gasoline translates into an additional cost of $1,000 a year for most drivers. As a result, low income households began to feel pressures from higher energy bills, which already affected negatively discounted retailers. Long term, the pain at the pump could become more widespread. A survey released in April by the Financial Services Forum, an association of the CEOs of 20 large U.S. financial institutions, reported its members’ view escalating energy prices as the biggest threat to U.S. economic growth, ahead of rising health-care costs and terrorism. The rise in gasoline also caused the fall in auto sales. Cars and light trucks were sold at an average 11.41 annual rate in June, the slowest in a year. (Chandra)
Besides household incomes, high fuel cost and energy prices, interest rate is another key factor that determines consumer spending in the economy. Interest rate hikes have already reduced demand for mortgage refinancing and home-equity loans, two significant sources of cash that increased consumer spending in recent years. As interest rate rose, consumers most likely found it less desirable and less reasonable to borrow against the equity in their homes. As a result, they tend to put off buying luxury goods for their home, such as TVs, entertainment systems, or other goods. With the above aspects, we as consumers are
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