Consumption (rather than savings/investment) is the source of economic growth. Surely that's obvious?
If we say that aggregate demand, shifts to the right and if there is spare capcity then the economy grows (rather than having demand pull inflation.)
What are the components of aggregate demand?
1. Consumption (C = f(Y))
2. Government spending
3. Investment
4. Net exports
If consumption increases then there will be an increase in investment (accelerator) and thus that injection in turn will create an increase in national income (multiplier) and thus growth.
UNLESS all the consumption is on imports, an increase in consumption will shift AD to the right (ceteris paribus).
If savings increase then demand falls (paradox of thrift). Thus if savings fall (consumption increases) there is growth.
Firms will not invest if they do not anticipate demand so without consumption, no investment.
Consumers consume and pay taxes. Taxes are revenue for government from which comes government spending. Without revenue (unless they borrow) governments cannot spend.
Thus consumption is needed.
Exports are to...people who consume.
Thus consumption is the main source of growth.
If people consume more on imports, there might be a current deficit,whereas more money leaving the country than enter it, such as money spending on imports is more than exports.It certainly would cause economic growth. And i believe the expansion of production capacity is the main source of growth.When there is space for production capacity to increse to meets the AD,achieve new marcoeconomic equilibrium, thus economic growth.
ReplyDeleteConsumption leads to an increase in AD and so increase in output. However if there will be always rise in cosumption, suppliers might not reflect so fast because of scarce resources that are avialable and so this might lead to an inflation. And so economic growth will be achived only in a short run when there will be a rise in AD. While if increases investment, this means that more money is spent on capital goods which will create benefits in the future by increasing capacity utilisation. Thats why i agree with Chee and think that investment is the most important indicator of economic growth
ReplyDeleteIt all depends whether we want to achieve growth in the short run or long run. In the short run consumption is vital in raising AD. However, in order to expand the capacity of the economy in the long run (LRAS) we need investment in order to increase the quantity and improve the quality of the factors of production.
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