In the article “When Consumers Capitulate” by Paul Krugman, the explanation of the effects on the economy due to a change in consumer behavior are presented. Krugman states that if consumers save more of their personal income, they are not spending as much and businesses are losing money. Moreover, if businesses are not generating profit, the government is not receiving taxes due to the lack of consumer spending. This affects the economy immensely because there is no money circulating within it, which ultimately leads to a recession. A recession is two or more quarters of declining economic activity. If the country were to fall into a recession, consumers will try to save even more of their income, inevitably making the economy worse. This is known as the paradox of thrift. …show more content…
The expenditures approach measures GDP by adding together the: consumption by households, investments by businesses, government purchases, and expenditures by foreigners. In summary, the expenditures approach counts the sum of money spent buying final goods. Krugman’s whole article revolves around the affects of real consumer spending on the economy. Real consumer spending includes the purchasing of both durable and nondurable goods and services. Durable goods are those that yield utility over a long period of time (i.e. a car). Nondurable goods are those that are used up right away (i.e. pizza). Krugman states that in order to have a more stable and better economy, consumers must spend. The expenditures approach states that consumption is the biggest spending in our GDP (roughly 70%). This is why Krugman’s article and the expenditures approach correlate with one another and help us understand how to measure the GDP for our country’s