Expenditure on final consumption, or what we know as final consumption, is the expenditure made by resident institutional units on goods and services used to satisfy individual or collective needs or deficiencies of their members.
Therefore, we are talking about a magnitude used in national accounting to measure a level of expenditure. In this sense, the expenditure undertaken by the different institutional units that reside in a given country, and that seek to satisfy those individual or collective needs presented by these units.
That is, the goods and services that a certain individual acquires, in addition to the expenses for the service that the individual has received, as well as the value of these services, which said individual receives in kind. In short, the total of what the individual, the State, as well as other institutions spends to satisfy, directly, the needs presented by said individual.
As a general rule, it is the State, or another institution, that offers services that we later pay through taxes. However, these services have value, as we said before. For this reason, this consumption, on many occasions and to further detail the national accounts, is divided into subgroups that measure said final consumption, but distinguishing according to the institutional unit that undertook said expenditure. For this reason, we have broken down items such as that of households, that of the central government, that of the autonomous government, as well as other measurable units.
This magnitude is one of the aggregates used to measure gross domestic product (GDP) with the expenditure method. Likewise, in Spain, for example, as well as in a large part of the world, it is the most important aggregate and represents close to 75% of GDP.
How is final consumption calculated?
Final consumption –from hereinafter CF–, in almost the entire planet, includes a series of variables that, when added, offer us this magnitude.
Among these variables, final consumption includes the following:
- Household final consumption expenditure.
- Expenditure on final consumption of the Public Administrations.
- Final consumption expenditure of non-profit institutions serving households (NPISH).
CF households + CF AAPP + CF NPISH = Final country consumption.
Once we have all the expenditure of the institutional units added, this magnitude refers to the total final consumption.
In short, it is the expenditure undertaken by the different institutional units that reside in a country, and which aims to satisfy the needs and direct deficiencies that these institutions present. That is, it does not include intermediate goods, for example, used to trade and make a profit. These will be computed when they have been acquired by a specific institutional unit to satisfy a need or, as we said, a lack.
Final household consumption
Very briefly, and given that we are talking about the main item of final consumption consulted, we highlight the final consumption of households. This is an item used in national accounting to measure the final expenditure undertaken by households in a territory.
Household final consumption expenditure includes purchases of goods and services made by these households to satisfy their usual needs. These purchases can be made both in the national economic territory and in the rest of the world.
In addition to these purchases of goods and services, household final consumption expenditure includes a series of imputed expenses, which people may not be aware of having made, among which the following stand out:
- Rental services for owner-occupied dwellings. The opportunity cost of acquiring a home as an investment good and not for family use.
- Income in kind. For example, wage earners can consume goods and services for free or at a greatly reduced price as part of their salary (meals, use of vehicles or homes, etc.).
- Financial intermediation services. The deposits and loans that households have with financial entities generate an expense in intermediation services that are estimated indirectly from the interest received or paid to households.
Purchase of goods and services + Imputed expenses = Final household consumption .
Therefore, these goods and services, in addition to those imputed expenses, make up what in national accounting we call "Household final consumption expenditure." As we know, the evolution of this consumption depends, directly, on the evolution of other variables such as prices, employment, wages, etc.