What is more appropriate to help stimulate economic growth, consumption or investment demand? What sector do you think our economy should look at stimulating, consumers or businesses? Explain your reasoning using the concepts of aggregate demand and supply.
Aggregate demand is the combination of four parts including the investment, consumption, net exports and government spending. The consumption can vary depending on some reasons. It includes the changes in taxes, income, wealth levels and expectation for future income. The investment can also change in response to the expected profitability of the investment which is shaped by the expectation for future economic growth, prices of key inputs, new technologies creations, changes in interest rates and tax incentives. Political considerations determine the government spending and exports change depending on the relative prices and growth rates of the two economies in between which exports are happening.
The Keynesian model highlights the aggregate demand. The basic perception behind it is that firms produce only when they expect it to sell. Therefore, while the availability of the various factors of production determines the potential GDP, the real GDP is determined by the actual amount of goods and services being sold.
It is the demand which leads to the supply of the goods and services and not the vice versa. Therefore, it is more appropriate to stimulate the consumption demand. This increase in the consumption demand will create space for increased investment, and the increased investment will yield an increased supply to cater to the increased demand in consumption making a path for growth and development. By stimulating growth by offering capital at reduced interest rates and providing relaxed tax payments would enhance the economy.
The consumer is considered as the king because it is the one factor which aids in economic growth. All investment depends on consumer demand. The aim should be to have a balanced approach. The encouragement of consumers for increased consumption would automatically increase the demand complemented by increased supply boosted by the business and investment-friendly economic policies. Equilibrium should be achieved in the aggregate demand and supply in an economy (Cate, 2013).
References
Cate, T. (2013). An Encyclopedia of Keynesian Economics, Second edition. Edward Elgar Publishing.
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