ECONOMICS Evaluate the significance of increasing levels of consumer borrowing for UK macroeconmic performance

Question

its a question on my economics exam paper that i am stuck on, any help or hints would be much appreciated :)

Answer 1

I was going to offer that it depends on the situation (it depends comes up a lot in economics). If the level of debt was low and increased to a manageable amount while the unemployment level was high, it might spur on an economy that is in recession.
(i.e. sales go up, production goes up, employment goes up, wages increase, the consumer debt is handled by increased hours and wages).

But if the level of debt was already high, then you get the effect the second answer describes. Initial increase in production, but then sudden decrease in consumer demand when the bills come due and bankruptcies increase.

From the wording of the question, it looks like a current affairs type of economic problem. I checked out consumer debt in UK.
BBC reports on Jan 3 this year that it is the highest in the world and bankruptcies are soaring. Not good to take on even more consumer debt at this time. Answer 2 seems right in the current climate.

Peace

Answer 2

UK Macroeconomic performance can be described by a combined equation:

Y = C + I + NX, or output(aka macroeconomic performance) is equal to consumption + investment and net exports.

So if consumer borrowing is going up, it means consumption is going up, so Y is going up... but where is consumption coming from? Since it is borrowed, it has the effect of decreasing the amount of money available for investment. So the net effect should be 0. However this assumes everything happens simultaneously. As other answers have addressed, if performance has increased, it stands to reason the cost is that when investment adjusts it comes at a cost of performance.

Answer 3

Look to the Solow growth model - growth is determined in the long-term by savings and technological advancement.

If savings is decreasing (increased consumer debt); then you're going to hurt long-term growth.


Most intermediate macroeconomics texts go into a lot of detail of the Solow growth model; most graduate texts take it as a given that you already know it---- so if you need a reference go with an undergrad text.


Edit: Bfleung is partially right......if this were a one-period model. If you want to see the effects of negative savings over multiple periods, "Foundations of International Economics" by Obstfeldt & Rogoff is a great start.

Answer 4

Increased consumer borrowing will ultimately cause the UK macroeconomic "economy" to slow as consumer borrowing hits it's limits. As the economy slows, more people become unemployed and they can't pay their debts forcing banks to raise interest rates thus further slowing the economy.

Answer 5

Increased consumer borrowing, from a macroeconomic view,tends to create inflation followed by recession.