Question

discuss how the demonstration effects may affect the economy area

Answer 1

Demonstration effect

The observation of the actions of others and their consequences which causes effects on the behaviour of individuals is called as the Demonstration effect. The developments in one place will often act as a catalyst at another place, therefore this effect is used in the political science and sociology sectors.

Some of the economists like Robert Frank, James Duessenberry and Thorstein Veblen were of the opinion that knowledge of the others' consumption habits will attract and inspire emulation in of these practices. In connection with economics, it is argued that this demonstration effect affected the saving rates and thereby the opportunities for macroeconomic growth by promoting unhappiness with current levels of consumption. Infact, the name demonstration effect was given to this phenomenon by economist James Duessenberry. Likewise, Ragnar Nurkse saw it as "international demonstration effect" as it created pressure in the developing countries to increase usage of material goods as the people get knowledge and come in contact with superior goods and patterns of consumption. This creates a level of dissatisfaction and restlessness among the people. AS per the economists demonstration effect creates a knowledge extension, peoples' imagination gets extended and stimulated and new desires are aroused which will have a vast impact on the economic growth of the country.

It is also a possibility that the investors do not have full information about the country where they are investing. This demonstration effect may help them by explaining the financial and economic crises in the countries. Thus, demonstration effect has a very huge impact on all aspects including the economy.