An economic expansion is synonymous with the more common term economic growth. A country's economy is considered to be in an economic expansion when the gross domestic product (GDP) increases over a specific time period. Expansion also occurs when there is an increase in the GDP per capita over a certain time frame. GDP per capita is simply the full GDP amount divided by the total population.
GDP is a country's output of goods and services within a specified time period. It can be thought of as the market value or price for which the aggregate of goods and services could be sold. GDP is comprised of four different components: consumption, investment, government purchases, and net exports.
Consumption refers to the amount that is spent on goods and services within an economy. It is the largest component of GDP and is sometimes referred to as consumer spending by economic analysts. An increase in consumer spending is often an indicator of a potential economic expansion.
The investment component of GDP consists of a government's fixed assets and inventory increases. An example of an inventory increase might be a fleet of recently purchased military planes. A government's fixed assets might include buildings used for housing political figures.
Government purchases are the amount of expenditures minus the amount of transfer payments. Transfer payments consist of unemployment payments or subsidized housing payments. Government purchases will often be increased as a way to stimulate an economic expansion if consumer spending is slowing.
Net exports can be thought of as a country's exports minus its imports. The monetary value of the goods and services a country produces and sells is subtracted from the amount of goods and services it purchases. The imports are subtracted in order to reflect the true definition of GDP, which is the monetary value of a country's output.
When an increase in GDP occurs, a country's overall standard of living increases as well. A standard of living increase is not only an indicator of an economic expansion, but a goal in itself. In terms of macroeconomic activity, an economic expansion is highly desired by most governments. Economic growth allows a government increased flexibility in meeting the needs of its society.
Growth occurs either naturally or through government stimulation. If a country's people have adequate financial resources and perceive their individual financial status as stable, they are more likely to spend more. Sometimes referred to as consumer confidence, buying and spending patterns for the general population are often dictated by their average income and their perceptions regarding the immediate financial future. If many fear a risk of job loss, overall spending may decrease. On the other hand, when many anticipate increases in salary or more lucrative job opportunities, overall spending may increase.