Spending by the consumer sector is the driving force in the US economic system.

Question

Spending by the consumer sector is the driving force in the US economic system. Although the business and government sectors make a considerable contribution to the success of the economy, it is the spending by the consumer or household sector of the economy that determines prosperity or recession in the economy. Do you agree or disagree with this argument? Why or why not? Support you answer with examples and references of how the business and government sectors of the economy are crucial in supporting spending by the household sector. How has the spending behavior of the government sector changed over the past decade, and what effect have these changes had on the economy?

Decision making in a business environment requires an understanding of cost and revenue data. This includes an understanding of marginal and incremental analysis, as well as basic cost and revenue relationships. Explain how a basic understanding of these concepts, as well as of managerial economics, can enhance the managerial decision-making process. Support your answer with examples and references.

Explanation / Answer

I agree with the statement that consumer spending plays an important role in the prosperity of an economy. Increase in consumer spending, consumer demand or consumption means purchasing power of consumer increases. It means consumers are able to consumer more goods and services in an economy. When demand by consumers or households increases then, to meet the demand, supply of goods and services also increases in that proportion. Increase in production of goods and services increases the gross domestic production of a country which utlimately shows the growth of a country.

Investment is also done by various companies or businessmen in the economy which also helps in the prosperity of a country. Similarly, government spending is also a part which helps in economic growth. Government spending to develop infrastructure, schools, hospitals, provide subsidies, etc helps in the growth of a country but spending by households and consumers is the major portion of aggregate demand. In GDP, consumption expenditure takes the largest share.

Government plays a crucial role in supporting spending by the household sector. Reduction of tax rates on commodities and increase in government spending in the form of subsidies increases the purchasing power of the consumers. As a result, consumer expenditure on the goods and services increases. Example : Decrease in sales tax from 1.5% to 1% increases the purchasing power of public and due to this they increase demand of other commodities or more commodities.

On the other hand, business sector also supports spending of the household sector. This occurs because by investing in various securities, investors earn more profit which increases their purchasing power. As a result, spending of households or consumers increases. For example : X purchase share of Z ltd for Rs. 1000. After 2 months, value of shares increases to Rs. 1300, this shows increase in the purchasing power of individual by Rs 300. This increase earning of houshold is used to purchase more goods and services in the economy and results in the increase of GDP.

In the U.S. government spending over past decades increases many times. Government increases its spending on retirement payments, education system, health care, etc. Government spending in nominal terms increases many times as compared to last past decade. Effects of increased government spending on the economy :

1. Better health services : When government spends more on the healtcare of the general public then, it improves the services provided by hospitals. Hospitals have the latest equipments to treat their patients.

2. Improvement in education system : Government spends much on the education of their public which results in increase in the skills of their nation. People are highly educated and possess skills that helps the country in future development.

3. Standard of living of people improves : When government spends on the education and health of general public then, public will be healthy and educated and indirectly supports in the growth of a country.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.