Tag: the economy

Why Consumer Spending Matters to the Economy

Consumer spending, the purchases of goods and services by individual people and households, is not only important for the economy, it is essential. Consumer spending is the number one factor in the economic health of a nation. The reason why is quite simple actually, the more money moves from business to business and person to person, the stronger an economy will be.

Mini-Economics Lesson

Let’s say we have an entire economy made up of three people: Dave, Bob and Mary. Dave is a farmer. Bob is a mechanic. Mary is an artist. Dave makes the food that Bob and Mary need to eat. Bob and Mary each pay $100 to Dave for food. Dave now has $200. Dave wants to have his tractor worked on. Dave pays mechanic Bob $100 to fix his tractor. Dave also wants a painting to hang in his home. He pays Mary $100 to paint him a beautiful landscape.

At the end of the day, farmer Dave has been paid for his farm work, he has a fixed tractor and he has a new piece of artwork on his walls. Mechanic Bob has food to feed his family and still has $100 to spend thanks to his tractor repair business. Artist Mary spent all her money on food at the beginning of the week but because she was able to do a job for farmer Bob, she has $100 to spend again. Farmer Dave doesn’t have any money right now, but he has food to sell. As long as Bob and Mary keep coming back to buy his food, he will keep having money to spend.

This is exactly what happens hundreds of millions of times each and every day. The only way an economy can operate is if its people, the consumers, continue to feel comfortable spending their money. Think for a moment what would have happened if farmer Dave decided not to spend his money after he sold food to Bob and Mary? He would have $200 in his pocket and he would also have food to sell, but he wouldn’t have anyone to buy that food because Bob and Mary both spent all their money.

There are three things that are most important in consumer spending

1. How quickly do people turn over their money?
The faster money changes hands, the stronger the economy will be.

2. How confident are people that they will get their money back once they spend it?
This directly relates to the first in the list. Again, using the example above, as long as artist Mary is confident that she will soon have someone else who will buy her paintings, she will be okay with spending the money she has. However, if she thinks that she might not sell a painting again for a long time, she will hold on to that money as long as she can.

3. Are consumers keeping their money within the local/national economy?
If people are spending more and more of their money on foreign goods or products, they are removing that money from the American economy. If farmer Dave decided to get his tractor repair done elsewhere, then local mechanic Bob would have no money and in their little economic system, the result would be a net economic loss of the $100 farmer Dave spent in another economic system.

Conclusion

For businesses to survive, they need customers. For customers to be able to afford new services and products, they have to have money. For the customers to have money, they must have a strong business or be employed by a strong business. The economy is a circle with money flowing around and around. The faster that money circulates, and the more money there is inside that circle, the better every individual will be and the stronger the economy as a whole will be as well.