Thanks for your question Mr Kidanemariam Gebregziabher.

• The equation of GDP = C + Ib + G + (X-M), if we start from this logic, household consumption which "C" is a key variable in GDP growth. On the other hand, if we also take into account the economic cycle, households sell services to enterprises and in return, they buy the goods and services produced by these enterprises. In this sense, there is a link between household consumption and GDP per capita. If households consume a lot, in return the sale of enterprises will rise, which generates an increase in GDP leading to a direct increase in GDP per capita.
• In other words, according to Okun's law (Arthur Okun, 1962), for each percentage point of 1% above the natural unemployment rate, the economy could have produced potential output greater than 2.5 %. This ratio allows us to calculate the absolute production loss associated with any unemployment rate. On the other hand, a fall in the unemployment rate leads to an increase in consumption and production (GDP), which also has a positive impact on GDP per capita.

Dear Kidanemariam Gebregziabher Gebrehiwot ; as pointed out by Hubermane Ciguino ; Theoretically it is consumption which affects GDP, not the other way around. The question is empirical; how much is the effect?

Domestic demand can also play a key role in the growth of real GDP. Increasing wages and increasing household disposable income, as well as low interest rates, have a positive effect on private consumption growth.

This is a noteworthy discussion, Professor Kidanemariam Gebregziabher Gebrehiwot . As mentioned by Hubermane Ciguino, the correlation between GDP per capita and household consumption can be depicted by the national income identity. Moreover, I absolutely agree with Professor Akhmad Solikin, the national income identity shows that GDP is the response variable while consumption is the explanatory one.

I would like to contribute to this discussion by pointing out that the national income identity is undoubtedly complex. Investment is a function of saving. Besides, saving is negatively impacted by consumption as income equals consumption plus saving (Y = C + S). Into the bargain, as income rises, marginal propensity to consume falls while marginal propensity to save increases. Furthermore, government spending is a function of tax. Also, tax revenue, particularly from value added tax or sales tax is determined by consumption. Yet, consumption is affected by income tax. And lastly, import is impacted by consumption as well. In a nutshell, the explanatory variables indicate multicollinearity.

We cannot earn more than what we produce. So the GNP per capita must always exceed the money returned for our labor. However there are two other kinds of returns according to Adam Smith. These are on the access rights to land (namely the economic or fair rent) and for the use of durable capital goods ( buildings, tools, vehicles and materials in process of manufacture), all of which return interest on their values or a dividend to the (capitalist) owners.

Dear all,

I thank you all for your valuable and high professional contribution. I benefited a lot from your contributions.