Question

Is high consumption good or bad for economic growth? why?

Answer 1

Consumption by people is an important aspect relating to economic growth. Economic growth in measured in terms of GDP, which is measured as follows:

Gdp= consumption+ investment+ government spending+ net exports.

As seen by the formula, consumption forms a part of GDP. Thus when consumption increases, it means people are spending, thus there is a huge demand in the market. To come into an equilibriun, producers increase their suppiles to meet the demand. Hence production increase leading to an increase in the production of goods and services. As a result GDP grows and an economy attains growth. A rise in consumption also signifies higher per capital income of people ,improve in their living standard.

However in certain cases when supply is not able to meet demands( say due to low agricultural production) , price tends to rise as too many people are running for the same good/service. As a result inflation occurs. In this case the GDP will show inflated figures. So in this case real GDP is taken into consideration by eliminating the inflation. Inflation can have severe impacts on the depriciation of currency. However it can also help in increase in exports as depreciation of currency leads to increase in exports but high cost in imports. At times if can also widen the gap of poor and rich.

Thus there must be a balance of all the things that happens in an economy. For such central banks of the countries undertake many policies to maintain stability of the economy. Nothing too much is beneficial. To sum up, high consumption is good for the economy and helps to attain growth but there must be a balance in it.