Question

• During our most recent recession spending in nearly every category plummeted. New car sales, housing, electronics, even food. Sales fell across the board. However, spending in one category increased by 18% in the United States and doubled in many other countries during this time. Why would consumers cut spending in so many areas and increase spending in one? Think about people you know. What did you and your friends spend more on during this time of belt tightening and why? Provide references please.

Answer 1

Expenditure is a result of requirements. The recent recession has been caused by the COVID19 pandemic where the global population is locked down in their respective houses. As a preventive measure, more of masks, soaps, and sanitizers is being used. In the state of lockdown it is evident that people are not going out, so their expenditure on transportation has been reduced to 0. People are consuming 3 meals a day at home, unlike what they used to do prior to the lockdown. Thus, expenditure on gas (for cooking) has increased. Staying at home also has caused greater consumption of electricity at home. Thus, expenditure on electricity bills has also increased. Consumers are even curtailing spending on food and beverages, and only looking to spend on necessities of life, in order to increase the spending in the newly added necessities like soap, sanitizers, masks, are other perpetual preventive measures. Since in the lockdown income of individuals has declined leading to a fall in GDP (hence the recession), at a household level budget has also fallen. Thus, it becomes important to curtail expenditure on electronics, cars, and even luxury food items.

Personally, I have also resorted to the kind of curtailing along with my friends and relatives. The incredibly low aggregate demand has taken its toll on the generation of income. Business families have been hit by the setback. Being part of one such I know, that when the sales plummets to 0, and staff needs to be paid income becomes negative at times. People belonging to this section can only thrive on past income and savings.

I have allocated a substantial share of my monthly budget on medicines, sanitizers, soaps, and masks, reduced the consumption of meat, and been spending more on vegetables and some fish. This has kept my diet balanced at a lower cost.

In the USA, the consumption patterns prove the same. Increased spending on gas and electricity is offseting the decrease in sales due to motor vehicles. Another example can be India to prove my point. The FMCG sector has benefitted from the current situation due to increased spending on soaps and sanitizers, and basic grocery items sold by them.

Another huge example of channelising funds is growing expenditure on alcohol. People have allocated huge amounts of money to it, curtailing other requiremnts. Indian state government is thus imposing 40-70% taxes on alcohol to boost governmnet revenue. In spite of that the states are receiving INR 20-40 crore revenue from the sale of alcohol.