how is increased consumer spending good for the economy?

Answer 1

I'm guessing you probably know the obvious answer: when you spend money, the people who provide those things get paid, and they spend money, so other people get paid, and so forth. (It's called the "multiplier effect" in introductory economics courses. See the first reference) (Wikipedia is your friend.)

Also, though, some of the money you spend gets invested in stuff that will be around for a longer time, like factories and roads and phone lines and stuff. Which benefits people in the future.


Now, all of this is based upon the idea that having more makes people feel better. And for most of human history (where living just above the poverty line was normal for most of the human race) this was probably a good assumption.

Over the past few decades or so, however, another viewpoint has started to get more attention: that is, when we have what we think is enough, having more actually makes us worse off. (And, of course, "enough" would be different for different people.)

That's just the short version, of course. You might want to check out the second reference.

Answer 2

Consumer spending is good for the economy because it increases aggregate demand. Aggregate demand is simply the combined demand for stuff in the entire country. When aggregate demand increases, Gross Domestic Product increases, and when GDP increases income increases (this is simply because GDP=Income). A secret about consumer spending is that it kicks off a chain of events. For example, when I buy a new car, I don't just increase GDP by $30,000, but by much more. This is because the car salesman takes that 30,000 and buys a new lawn mower, and then the lawn mower company owner will go out and buy a new business suit with that money and so on. This characteristic of spending is called the multiplier. This sequence continues until the all of the money from the original purchase dries up (because people save money instead of spending it all, some of the money leaves the chain in each step and taxes also take some money out in each step therefore the chain cannot go on forever). For example, if the multiplier was 2, then that initial $30,000 car purchase would actually increase aggregate demand by $60,000.

Answer 3

Consumer spendind accounts for nearly 80% of the American economy! :-)=