What is domestic demand?

When we talk about domestic demand or domestic demand, we refer to spending on goods and services and investments made by residents of a country during a certain period of time (which is normally every year, although it can be measured on a quarterly basis).

In this case, when we speak of a resident, we are referring to the citizens of the country, companies and the Government. In other words, everything that people residing in a country consume on a daily basis, plus what companies and the government consume and invest make up the concept of internal demand.

In addition, this economic indicator is widely used to know the degree of development and the level of well-being of a country, thus being able to compare it with the rest of the countries of the world. When domestic demand grows, so does production and employment.

Elements of domestic demand

Mainly, there are 4 elements that are presented in the domestic demand:

  • Household consumption (C): It refers to the total of goods and services that families and, in general, the people who live in a certain place consume in order to satisfy their needs. It includes food, clothing, health, leisure, etc.
  • Government expenditure (G): It refers to the investments that governments make to carry out the activities carried out in favor of the residents of a country. They do it through their public administrations that are distributed throughout the country, and include expenses such as payment of infrastructure, salaries of officials, offices, country improvements, etc.
  • Investment (I): Investment refers to the expense that companies make to be able to produce goods and services and being able to sell them to individuals (machinery, infrastructure, etc). This section includes spending on companies' inventories (payment for raw materials, semi-finished products, etc.) and investments made by households (such as buying a home)
  • Exports and imports (XN = XM): This element only occurs in open economies that perform Transactions with the outside. Those goods, services and investments that are made with other economies than their own are collected.

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