This morning, millions of families across the globe would’ve opened another door on their advent calendar, awaiting the subsequent fanatical opening of presents on Christmas morning itself. Conversely, this influx of consumption during the festive period isn’t only observed on a micro level, but also across the whole country, along with the other factors that make up aggregate demand. However, before I delve into the substance of this report, I think it is key to clarify some definitions.
Aforementioned in the title, aggregate demand (AD) is the sum of consumption (C), investment (I), government expenditure (G), and the trade balance (X-M). Although there are some technical differences, the terms ‘aggregate demand’ and ‘gross domestic product (GDP) can be substituted. Both of these refer to the total value of goods and services produced in an economy over a period of time. Simply put, consumption is spending on goods and services used to satisfy human wants and needs, whilst investment is spending on capital (tools used by humans to produce goods and services) by firms. Government expenditure is spending by the government (public sector) on goods and service such as healthcare and education, and the balance of trade is the value of exports (goods and services that the UK provides that are purchased by other countries) minus the value of imports (good and services that are provided by other countries that are purchased by the UK).
With that being said, lets take a look at consumption during Christmas – as you might expect, it significantly increases. The office for national statistics (ONS) confirms that since 1997, consumer spending has been higher in Q4 (October-December) than throughout the rest of the year for nearly every year. The only anomalies here are in 2008, when the UK, along with much of the world, was struck by the 2008 financial crisis, and in 2020, when the UK, along with much of the world, was struck by the coronavirus pandemic. To take a recent example, consumer spending was £361 billion pounds in Q4 of 2021, compared to £290, £329, and £345 billion in Q1, Q2, and Q3 respectively. Furthermore, consumption rose by 9% between November and December in 2018. With economics being a social science, the reasoning behind this increase in consumption can’t solely be explained by spending on presents and decorations for Christmas. For instance, the time of year that Christmas occurs means that there is increased spending on energy, since people need to keep their homes heated. However, due to recent over-commercialisation, the majority of Q4 is considered as the lead up to Christmas, suggesting that the festive season does contribute to the increase in consumer spending. Moreover, on Christmas Day, a whopping 402,144,104Kwh of electricity are used in households across the country. This is a huge anomaly, compared to the 323,342,465Kwh used on an average day throughout the year. To crunch some more numbers, the average household spends 29% more in December than they would during the rest of the year – that equates to the £740 increase from the average monthly expenditure of £2,500. All these statistics evidently demonstrate an increase in consumption during Christmas, which, with all other factors being equal, will lead to a rise in aggregate demand.
Moving onto investment, a concept that is less affected by the time of year. ONS recorded gross domestic fixed capital formation (net investment) in 2016. In Q1, this was at £1.074 billion, whereas in Q2 and Q3, it was at £-427 and £-757 million pounds respectively (showing high levels of depreciation). This clearly shows a high level of investment in Q1. This is because, over the festive period, firms see large profits, since there is lots of consumption in the economy. Therefore, they use these profits to invest in capital in the new year, with this investment mainly happening in Q1 (January-March). Comparatively, investment doesn’t change much in Q4, as opposed to Q2 and Q3, no in the overall aggregate demand equation, the level of investment stays relatively constant over Christmas.
Similarly to investment, government spending does not change that much over the festive period. Spending on education and defence stays at a pretty constant level, assuming that there are no exogenous shocks to the economy. Regarding the NHS, government spending does increase, because more people fall sick during the festive period, getting illnesses such as the flu or pneumonia. The main anomaly in terms of government expenditure that Christmas time brings about is on Christmas day itself. This is due to shrunk workforce on the 25 th of December. In fact, on Christmas of 2008, 2010, 2012, 2014, and 2016, merely 1-1.1 million people were in work, which made up 3-4% of the UK labour force. Many of these jobs would’ve been part of public sector employment, so government spending, in terms of wages and salaries, decreases on Christmas day itself. On a larger scale though, this doesn’t really contribute to a huge increase or decrease in government spending, consequently leading to aggregate demand not largely being affected by public sector expenditure.
Finally, the balance of trade. Importantly, both exports and imports increase during December, since there is an increase in demand and consequential increase in consumption globally. However, as a nation whose exports are focused more on big ticket items such as cars, and the exportation of services, the UK sees a much larger increase in imports than exports. This leads to a worsening of the UK’s trade deficit. Ceteris paribus, this will lead to a decrease in aggregate demand.
To summarize, it is useful to remind ourselves of arguably the most important equation in economics: AD = C + I + G + (X-M). We have seen that over Christmas, consumption increases greatly, whilst investment and government expenditure waver very little. Comparatively, the trade balance worsens. However, the spike in consumption is so large that overall, aggregate demand (AD) increases over the festive season.
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