Expenditure shares
Consumption
From basic macro, we know we can account for GDP on the expenditure basis, or $Y = C + I + G + NX$. We’ll be mainly concerned in this class with consumption (C) and investment (I). What we want to look at first is the fraction of GDP that is accounted for by consumption, or $C/Y$.
This first figure shows that ratio for the set of countries that had relatively stable growth. Both Mexico and the UK had sustained declines in this ratio from 1950 to about 1980, but at that point they joined the other countries in having consumption ratios that were pretty flat. There was variation across countries (e.g. the US has a higher consumption ratio than Canada) but these ratios tend to be consistent over time for any given country.
If we look at the second set of countries that were experiencing catch-up growth (we think), then things get a little more exciting. You an see South Korea experience a fall in the consumption ratio to about 1985, but then it stabilizes. Germany (DEU) and Japan both have relatively stable consumption ratios throughout this time period, even though both were experiencing rapid growth. China has seen a significant decline in the consumption ratio, and with Nigeria it is hard to know how to classify the consumption ratio, given that it fluctuates a lot in the last few decades.
Much like we did with growth rates, we’re going focus on the stability among mainly developed countries to establish another stylized fact.
The ratio of consumption to GDP ($C/Y$) tends to be stable over time for developed economies.
Again, this doesn’t imply that consumption ratios are identical across countries. It just means that for a given country, it tends to be stable. And it doesn’t account for the experience of developing economies (e.g. Nigeria and China) that have either a lot of variance or steady declines in their consumption ratios. But once we establish a model of how stable, developed economies work, we’ll see how we can adapt that to explain what we see with places like Nigeria and China.
Capital formation
The second ratio we want to think about is of investment to GDP, or $I/Y$. Before we look at that data, I want to pause to make a point about terminology. The world “investment” in the national accounts refers to purchases made of new capital, like structures (e.g. houses and office buildings), equipment (e.g. computers and bulldozers), or intellectual property (e.g. software). These purchases either replace worn-out old capital, or are new capital goods added to the stock.
The term “investment” was a poor choice, because it tends to call to mind the idea of investing money into the stock market (or some other financial transaction). And that is not what we’re talking about here. The purchases of capital that $I$ stands for should really be called something like “gross fixed capital formation”. How those purchases were financed (loans, issuing bonds, raising equity from shareholders) is irrelevant to us for now.
Okay, back to the data. This first figure shows the $I/Y$ ratio for the first set of countries. Perhaps as expected, this is pretty boring. The ratios are all around 0.20-0.25, and they stay pretty stable over time. The UK (GBR) looks like the ratio declined during the last few decades, but for the most part the fraction of GDP made up of purchases of capital goods was stable.
If we flip to the second set of countries things again get a little more exciting. Korea had the ratio rise from 1950 to 1980 (a mirror image of their fall in the consumption ratio) and then stabilized. Nigeria’s ratio jumped around at first, but then has been relatively stable (but low) at around 0.15 since 1980. Japan’s ratio was high around 1970, and has declined slowly since then. China’s ratio of capital formation to GDP rose steadily from about 1970 onwards, matching the decline in the consumption ratio. As is usual with this group, things are not as stable as with the first group of countries.
Regardless, this ratio of gross capital formation to GDP doesn’t swing wildly year to year, and it doesn’t bounce between 0 and 1. It stays within a fairly narrow band of values for each country, although there may be some shifts. We’ll be able to accommodate those shifts when we get to modeling growth. But the two figures will lead to the following stylized fact.
The ratio of gross capital formation to GDP ($I/Y$) tends to be stable over time for developed economies.