Households spend money on food, electricity bills, phone bills, rent, bus fares, fridges and so on. All of this is Personal Consumption Expenditure (PCE). For National Accounts everyone pays rent: even if you own your own home, PCE includes an estimate for the rent you pay yourself (see Imputed Rent). Personal Consumption Expenditure is all spending on goods or services to satisfy the household’s needs and wants. It includes the spending of Non-Profit Institutions Serving Households (NPISH) on satisfying households' demand.
Some household spending is not PCE but Capital Formation, such as buying houses and apartments or building an extension to a house. If a self-employed person buys fixed capital assets for their business, that is also part of the Capital Formation of Households. However most spending on durable goods like cars, furniture and appliances is part of PCE.
The cost of holidays taken by Irish people abroad is also included in PCE for Ireland, even though the money is spent in hotels and restaurants in other countries. On the other hand, when foreign tourists visit Ireland, their spending in this country is excluded from the Irish PCE total (tourist spending in Ireland is a service Export).
If a household is paying a mortgage, only some of that expense is part of PCE. For National Accounts, we break down the interest into pure interest and an implicit service charge by the bank (see FISIM). Only the service charge is part of PCE. The pure interest is part of the Investment Income paid by the household. The repayments of the principal is a transaction of the Financial Account.
PCE excludes spending by businesses, even on consumer goods and services, like entertaining in a restaurant.
In Ireland’s National Income and Expenditure we include in PCE the consumption of some goods and services which are paid for by the Government. For example, under the Drugs Payment Scheme, the Government pays some of the costs of medicines bought in the pharmacy if a household spends more than a certain threshold in a month. In practice, the household pays the amount up to the threshold, and the Government pays the rest directly to the pharmacy. For National Accounts purposes it is considered that the state provides the money to the households and the household pays the pharmacy. Transfers to households like this are included in personal income and personal expenditure. This category is officially called “Social Transfers in Kind – Market Production Purchased by General Government.” The other significant Government transfers included in PCE are:
In the Institutional Sector Accounts, the equivalent item is Final Consumption Expenditure of Households and NPISH, and this excludes all Government transfers. Actual Individual Consumption is wider than PCE, and also includes Social Transfers in Kind – Non-Market Production of General Government. These relationships are illustrated in the diagram.
