Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Taking imports out of the equation

One issue can easily seem a little confusing: why do imports (M) have to be taken away in (equation [1])? After all, if Y is equal to total goods and services produced domestically, surely imports shouldn’t feature here?

The reason is that total consumption (C) is actually equal to the consumption of domestically produced goods (C_D) and the consumption of imported goods (C_M):

The same is true for investment (I) and government spending (G):

Substituting these expressions into equation (1) gives:

Really, the imported terms shouldn’t be there because Y should equal total domestic output. The good news is that deducting all imports (M) takes them out of the equation. To see how, notice that:

Substituting this back into equation (2) gives:

This cancels all the import terms, leaving:

This expression makes clear that aggregate demand is the total demand for goods and services produced domestically. It includes domestic purchases by consumers, firms and the

government ( ) but also purchases by foreigners (X).

Tucking in! Consumption

Consumption (C) is the largest component of aggregate demand: in the UK it accounts for some two-thirds of output. In other words, around 60 per cent of everything produced in the UK ends up being consumed by households in one way or another. So whether you’re slurping a soft drink, chomping on a chocolate bar or even gobbling some grapes, you’re contributing to the country’s consumption.


Consumption doesn’t just include things you literally consume such as food and drink (and, if you’re Homer Simpson, flowers!): all goods and services that households purchase are included in consumption. So the flat-screen TV you got for Christmas is consumption. That train ticket you bought last week – that’s consumption. Even the rent you pay for your tiny overpriced flat in London counts as the consumption of ‘housing services’.

Basically, if you buy something – and you aren’t an entrepreneur buying something for your business – it’s probably consumption.