Why spending money helps the economy

For example, uncertainty is more if your company depends on something external for their expansion like weather, any particular raw material etc. Your spending should also depend on the nature of your family. Your spending pattern will vary depending on whether you and your partner are planning to have any children, expecting any large repairs on your assets, potential health issues, retirement plans of your parents , among other things.

While we talk about the importance of spending to boost the economy. It should have a long term reciprocal benefit as well. A logical analysis of the economy shows that the route to improved productivity of a nation lies in the improving of capital goods. This can be done only when you save your money and invest it in productive activities. However, be mindful that saving is totally different from hoarding.

This is the reason why it was said earlier that one needs to strike a balance between spending and saving. Saving does not mean dormancy of your money. It simply means that it is entrusted in productive activities that will subsequently improve the economy unlike hoarding. People tend to inherently have an attitude to save money due to the constant reinforcement we have had about financial management. However, everybody needs to know about certain nuances and advantages of savings and how it will impact the economy.

If you have good savings means you are better protected against debt. You can cover your unexpected expenses without taking a loan. It is indeed a great relief considering the repercussions that a thoughtless loan can have. Along the same line, it will help you control your living expenses and thereby finish your loans as soon as possible. This means that your ability to recover during an economic hardship is higher and that will further improve the chances of recovery of the economy.

It also means that you are better protected when you are living on your own means. Savings are not without any risks. People who save and invest will have to pay a huge price if the economy goes through a recession. So brace yourselves for uncertainties and losses while you save as well. The balance that we need to have between spending and saving is the most important discipline that we need to follow to support the economy. To spend does not mean that you should use your money to buy all the things you want.

Neither does that mean that you should donate everything you get. This stock of capital goods can only be increased if money is invested in productive activities. Hence, this philosophy is very different from the spending philosophy since it emphasizes on the need for savings and the correct diversion of those savings to productive activities. The spending approach to economic growth can be seen as of the significant reasons behind many economic ills.

Firstly, many governments have gone deep into debt in order to stimulate spending and recover from financial setbacks. This approach will only work if the expenditure is done on capital goods. On the other hand, if the money is used to make welfare payments, then the spending would have done more economic harm than good. In the short run, it will help in increasing the GDP. However, in the long term, it will only lead to more indebtedness.

Similarly, the spending approach is creating several problems with personal finances. A large number of individuals find themselves in debt because they have been brainwashed into spending money. Incessant spending does not create prosperity for the individual just like it does not create prosperity for the entire nation.

The fact of the matter remains that before individuals consume, they must have produced goods of equal or more value. This is the only way real economic growth can be achieved in the long run. The difference between saving and hoarding must be clearly understood.

Saving means that the money is entrusted in the hands of people who intend to use it for productive purposes. These include so-called durable goods, such as washing machines, automobiles, and furniture. More frequently, we buy non-durable goods, such as gasoline, groceries, and clothing. There are five determinants of consumer spending. These are the things that affect how much you spend. Changes in any of these components will affect consumer spending.

The most important determinant is disposable income. That's the average income minus taxes. Without it, no one would have the funds to buy the things they need. That makes disposable income one of the most important determinants of demand. As income increases so does demand. If manufacturers ramp up to meet demand, they create jobs. Workers' wages rise, creating more spending. It's a virtuous cycle leading to ongoing economic expansion. If demand increases but manufacturers don't increase supply, then they will raise prices.

That creates inflation. The second component is income per capita. It tells you how much each person has to spend.

Income measurements might rise just because the population increases. Income per person reveals whether each person's standard of living is also improving. Income inequality is the third determinant of spending. Some people's income may rise at a faster pace than others. The economy benefits when most of the gain goes toward low-income families. They must spend a more significant share of each dollar on necessities until they reach a living wage.

The economy doesn't benefit as much when increases go toward high-income earners. They are more likely to save or invest additions to income instead of spending. The fourth factor is the level of household debt.

That includes credit card debt, auto loans, and school loans. Current consumer debt statistics show that household debt has reached new record levels. Consumer spending makes up more than 70 percent of the economy, and it usually drives growth during economic recoveries. Every quarter, when the government releases its latest GDP figures, we hear the familiar refrain:.

The truth is that consumer spending is not the mainstay of the U. Investment is. Business spending on capital goods, new technology, entrepreneurship, and productivity is more significant than consumer spending in sustaining the economy and a higher standard of living.

In the business cycle, production and investment lead the economy into and out of a recession; retail demand is the most stable component of economic activity. Granted, personal consumption expenditures represent 70 percent of gross domestic product, but journalists should know from Econ that GDP only measures the value of final output.

It deliberately leaves out a big chunk of the economy—intermediate production or goods-in-process at the commodity, manufacturing, and wholesale stages—to avoid double counting. I calculated total spending sales or receipts in the economy at all stages to be more than double GDP using gross business receipts compiled annually by the IRS.

By this measure—which I have dubbed gross domestic expenditures, or GDE—consumption represents only about 30 percent of the economy, while business investment including intermediate output represents over 50 percent. Thus the truth is just the opposite: Consumer spending is the effect, not the cause, of a productive healthy economy.