The term domestic demand is generally understood to mean that demand for goods and services that arises only in Germany and thus in the area of the internal market. Together with export demand, it forms total demand.
In this lesson we explain the concept of domestic demand, its structure and then clarify the most important influencing factors. You will then have the opportunity to put your knowledge to the test with a few practice questions.
Synonym: domestic demand
Why should you know the domestic demand?
Domestic demand can be a decisive factor, especially at the business level, when it comes to investments, new locations and the development of new products.
Breakdown of domestic demand
According to fun-wiki.com, domestic demand can be broken down into three components :
- Consumer goods demand
- Capital goods demand
- Government demand
Domestic demand: Subdivision of domestic demand
The demand for consumer goods captures the demand of households. The demand for capital goods, on the other hand, captures that of companies. In the area of government demand, those goods and services that the government needs are summarized.
The demand for capital goods is mainly concentrated where the required goods are produced particularly cheaply. Above all, wage costs play a major role here. If these are too high, as is often the case in developed industrialized countries, companies relocate their investments to other countries with lower wage costs.
Depending on the school of thought, consumer and capital goods demand are emphasized differently. In Keynesian theory, macroeconomic demand, and thus primarily consumer goods, has an important position. The neoclassical theory attaches greater importance to investment demand.
Influence of labor costs and national debt on domestic demand
Labor costs are seen as a particularly important factor in relation to domestic demand. It is true that lower wages reduce the costs of producing and providing goods and services. On the other hand, lower wage costs mean lower incomes for the consumer.
However, since wages form the basis of a country’s domestic demand, a wage cut can have a negative impact on demand for consumer goods. The lower prices, which lead to lower wages, can also make a product more attractive for export. In addition, a company can employ more workers if the wage level is lower. The result can be that at least the overall economic wage bill does not fall and thus domestic demand also remains constant.
Impact on demand for capital goods
The impact of wage costs on the demand for capital goods is also often discussed. However, wage costs are just one of several factors that affect domestic demand. The availability of qualified employees, who in turn justify higher wage costs, also plays a major role here. In addition, the investment location, the existing infrastructure, taxes and subsidies, legal aspects and the exchange rate risk are relevant.
Public debt is also a factor that affects the level of domestic demand. If the national debt rises, one assumes higher government demand and, consequently, an increase in domestic demand. However, this effect does not take hold in the long term, as the interest burden of the state increases and its demand decreases again.