Homework help?

Question

I read the whole chapter and can't find this one answer, can someone point me in the right direction?

The question is:
Why might it be necessary to reduce consumer spending in order to attain faster economic growth? Would it be worth the sacrafice?

I don't really understand why a reduction in consumer spending would mean faster economic growth. I thought maybe it is because we are importing most of our goods, so if we spend less, less money goes overseas. But I don't think that is the right answer? Help please?

please don't give me bs about not attempting to find the answer myself. either help or don't answer

Answer 1

Post the Chapter and you'll have multitudes of answers

Answer 2

Increase saving rate, divert money from consumption to investment. Harrod Domar model maybe? I am almost certain it has to do with consumption vs investment and the saving rate. Interesting subject matter. Whether it's worth the sacrifice or not is subjective, depends on people's time preference for money and interest rate/rate of return on investment. Places in the Orient tend to have low C and high I, I believe. China and others. But that is not so much by choice but bc they don't have consumer driven economies like the USA.

Russia during the commie yrs tried stemming C to have huge I and big growth. Didn't work out quite right, forgot exactly why--what level of course is this btw? Once again pretty interesting stuff.

To be less theoretical about it, it would mean like: instead of Chinese ppl spending on alcohol, toys and movies like Americans, they save it and banks lend out money to build up factories and infrastructure that later boost the GDP growth rate. So yeah China is a pretty good example of this question.

Answer 3

Consumer spending means , basically goods for consumption. It just ensures market for goods. Just a cycle. Whereas, economic growth in real sense is increase in capital outlay, infrastructure , spread out of huge industrial estates etc. All this requires funds, without need to depend on deficit financing (deficit financing again retards growth due to over-induced inflation !).
When consumer spending is reduced, savings are generated big way, and growth oriented infrastructure gets a big boost. The 'cost' is literally borne by the sacrificing consumers, who would postpone the luxuries to a later date, and hopefully expect to get rewarded well if the invested structures do well.

Answer 4

Beh, it's late and my head is getting fuzzy, but you've asked a challenging question, so I'll throw some things out for you to think about:

- Inflation- reduced consumer spending may help reduce inflation and decrease the money supply. In the long run, it will lead to reinvestment and stronger economic growth, but I'm not sure about the "faster" economic growth.

found:
"The only time it becomes necessary to reduce spending on consumption in order to increase spending on investment is when there is zero unemployment and hyperinflation is threatening. That's when you should raise taxes on consumption (I recommend Robert Frank's Progressive Consumption Tax) and interest rates on non-commercial loans, but not when there is any slack at all in the economy."
http://economistsview.typepad.com/economistsview/2006/07/a_short_guide_t.html

Good luck.

Answer 5

Look up the books definition of econmic growth. Usually its the rate of increase in GDP over a given period of time, but your book might be different. If it is the rate of change in GDP, then the question dosent make sense

Answer 6

Azygos (above) seems right. Less consumption means more money could be saved and the same could be routed to investment. It means more production, jobs....... But yes it is theoretical.

Answer 7

Supply and demand. Supply side economics