Intermediate Macroeconomics: Consumption

Consumption is the largest expenditure component in the US economy, accounting for between 60-70 percent of total GDP. In this set of notes we study consumption decisions. In micro you probably studied how people choose consumption among different goods in the cross-section: for example, how many apples and oranges to consume. In macro we study consumption in the time series dimension: how much total consumption does one do today versus in the future. So as to study the behavior of consumption as a whole in the time series dimension, we engage in the fiction that households only consume one good. I will consistently refer to this one good throughout the course as “fruit,” though in reality it is more like a composite good or a basket of goods. Think about it this way – a household has some income to spend each period, and it must decide how much of that income to spend on consumption goods. We are going to study that decision. How that expenditure is split among different types of goods (e.g. apples and oranges) is the purview of microeconomists.