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The role of consumption in the macroeconomy

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As US shoppers retreat, can world thrive?
Consumers were the biggest engine of global growth. But indebtedness prevents that now.
By Peter Grier | Staff writer of The Christian Science Monitor

from the October 23, 2008 edition
In 500-600 words, please analyze the basis for the trends in consumption patterns as discussed in the article. In your analysis, consider the utility derived from the products mentioned in the article, describe what has occurred to change the demand for, or the supply of, the good or service, and market prices of those products or services.

If you use other articles and/or references (prefer U.S. articles & references), please provide me the link so I can reference the info.

Solution Preview

Recall that GDP (C+I+G+NX) is just an aggregate of the price of every good or service sold multiplied by the number of those goods or services sold. Since U.S. consumption makes up about 68% of GDP fluctuations in consumer spending have much force on GDP. The article gets at the idea that consumption spending in the U.S. is soft. This is in part due to falling housing prices, which affect household wealth and therefore consumption habits. Additionally, much recent spending from consumers has been debt financed. Given the current credit crisis and household debts, household's are likely to borrow less and consume less in the immediate time period. The article mentions a range of goods from durables (cars) to non-durables (Plasma T.V.'s). It is likely that consumption for "the necessities" will hold while consumption of luxury goods will fall off as ...

Solution Summary

The following solution is based on a recent article discussing consumers and GDP. It provides a discussion of the economy and the role that consumers play in it. I discuss the national income accounting identity, Keynes, and the role of fiscal policy.