The smallest component of aggregate spending is consumption, or personal spending by households. Consumption is the sum of all the goods and services that households purchase for their own use. This includes spending on durable goods, such as cars and furniture; semi-durable goods, such as clothing; and non-durable goods, such as food and energy. Consumption also includes services, such as healthcare, education, and entertainment.
Consumption is the main component of aggregate spending, making up around two-thirds of the total. Other components of aggregate spending include investment, government spending, and net exports. Investment is spending by businesses on capital goods and other investments, such as stocks and bonds. Government spending is the sum of all the money spent by federal, state, and local governments. Net exports are the value of exports minus the value of imports.
Consumption is considered the smallest component of aggregate spending because it makes up the smallest proportion of the total. However, it is still an important factor in economic growth, as it contributes to job creation and boosts the economy. Consumption is also a major driver of demand, as households’ spending helps to create demand for goods and services from businesses. As such, consumption is a critical factor in economic growth and can be an indicator of economic health.