Economic expansion is when a country’s GDP increases over a specific period of time, with an increase in per capita GDP. GDP is made up of consumption, investment, government purchases, and net exports. Economic growth is a goal for most governments and can occur naturally or through government stimulation. Consumer confidence and perception of financial stability can affect spending patterns.
An economic expansion is synonymous with the more common term economic growth. A country’s economy is considered to be in economic expansion when the gross domestic product (GDP) increases over a specific period of time. Expansion also occurs when there is an increase in per capita GDP over a certain period of time. GDP per capita is simply the entire amount of GDP divided by the total population.
GDP is a country’s production of goods and services within a specified period of time. It can be thought of as the market value or price that the aggregate of goods and services could be sold for. GDP is made up of four different components: consumption, investment, government purchases and net exports.
Consumption refers to the amount that is spent on goods and services within an economy. It is the largest component of GDP and is sometimes referred to as consumer spending by economic analysts. An increase in consumer spending is often an indicator of a potential economic expansion.
The investment component of GDP consists of a government’s fixed assets and increases in inventories. An example of an inventory build might be a fleet of recently purchased military aircraft. A government’s fixed assets might include buildings used to house political figures.
Government purchases are the amount of expenditures minus the amount of transfer payments. The relocation payments are made up of unemployment benefits or subsidized housing benefits. Government purchasing will often be increased as a way to stimulate an economic expansion if consumer spending is slowing.
Net exports can be thought of as a country’s exports minus its imports. The monetary value of the goods and services a country produces and sells is subtracted from the amount of goods and services it buys. Imports are subtracted in order to reflect the true definition of GDP, which is the monetary value of a country’s output.
When there is an increase in GDP, a country’s overall standard of living also increases. A level of life growth is not just an indicator of an economic expansion, but a goal in itself. In terms of macroeconomic activity, most governments want economic expansion. Economic growth allows a government greater flexibility in meeting the needs of its society.
Growth occurs naturally or through government stimulation. If people in a country have adequate financial resources and perceive their individual financial status as stable, they are more likely to spend more. Sometimes referred to as consumer confidence, the buying and spending patterns for the general population are often dictated by their average income and their perceptions about their immediate financial future. If many fear a risk of job loss, overall spending could decrease. On the other hand, when many anticipate salary increases or more lucrative work opportunities, overall spending can increase.
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