Consumption expenditure refers to the purchase of goods and services for individual or household consumption, as opposed to the purchase of materials or services used in production. Understanding consumption expenditure is vital to analyzing an economy, whether of an individual household or a large nation. In general, discussions about consumption expenditure revolve around the categorization of expenditures, the proportion of income used for each category, and the relationship of consumption expenditure to overall financial stability.
There are several categories used to break down consumption expenditure for further analysis. In almost any economy, the majority of consumer expenditure will go toward acquiring and maintaining basic survival goods and services, such as shelter, food, health care, and clothing. In addition to basic needs, expenditure also goes toward a variety of both necessities and demanded services, such as transportation, personal insurance, and entertainment. These categories are even further broken down by some analysts; for example, to determine how much money a household spends on restaurant food as opposed to groceries.
Examining data on consumption expenditure helps gives business, financial, and government experts a clear picture of the spending habits of consumers. When news reports suggest that the Christmas shopping season has a good or bad outlook, it is usually based on the analysis of consumption expenditures. Data on spending also gives information on how different populations, divided by geography, age, household unit size, or even ethnic background, use their available income. It can also help determine cost-of-living indexes for different regions, and show how spending habits change over time.
Governments can use consumption expenditure data to help create targeted assistance and development programs. If a geographic region has much higher-than-average food costs due to the need to import most of its food, a government might help reduce the burden of expenditure by funding communal kitchens in the area. Likewise, if housing costs have dropped significantly in a region, governments may be able to cut back on expansive housing assistance programs without unduly harming citizens.
On a personal household level, an analysis of consumption expenditure is crucial to helping prepare a personal budget. Knowing how much money goes towards rent, bills, food, and extraneous expenses helps explain where money is going each month and areas where spending needs to be cut back or expanded. Some financial experts recommend tracking expenses for a few months and creating a basic pie chart of expenditure to determine the percentage of income that goes into each category.
