ASSIGNMENT # 1

Yes - agreed. America is a prime example of this coordinated and comprehensive developmental strategy. It's a
prodigious consumer of its own goods apart from imported products. Increased Consumptions expenditure results in
more money flowing into the market, good employment rates, better incomes and higher earnings which in turn
results in further stimulation of consumption which finally directly triggers the growth potential. Plastic money and
undemanding bank lending on competitive rates may result in higher consumption and trigger growth, if the proposed
public expenditure will benefit the population in the future which expenditure on health, education and the critical
infrastructure then the regulation of public finance would suggest funding the program through debt rather than
taxes.
China is finding its solid place amongst exclusive group of mainstream economies that run the world nowadays. The
days are gone when western companies used to go to China to invest mainly because of its cheap labor, they now go
to China to manufacture and sell. No wonder GM's total vehicles sold in China outpaced its U.S. sales for the first
time in 2011.
The impetus to push economy further comes from three factors, namely:
1. Investment
2. Foreign trade
3. Consumption
It is more than 3 decades that the economy in China has been driven mainly by government investment and foreign
trade alongside with disproportionate domestic consumption. However the notion that investment led growth has run
its course is a debatable issue but consumption led growth can go along with the classical way of growth led by
increased production and Investment.
This can be explained theoretically with the use of the circular flow model which demonstrates an uninterrupted
movement of production, consumption, income, and services that move between producers and consumers.
According to this model there are four economic sectors:
1.
2.
3.
4.

Household sector (consuming population)

Business sector (all the producers)
Government sector (taxation and government spending)
Foreign sector (imports and exports)

While the markets being: product, resource and financial

Consumption expenditures are the continuous circulation between the household sector and the product markets. In
particular, the household sector makes consumption expenditures to purchase a portion of GDP from the business
sector through the product markets. The household sector then pays for these purchases with income received from
selling factor services to the business sector through the resource markets. Thus this sustained connection between
consumption, gross domestic product (GDP), business revenue, factor payments, and income, is the essence of the
circular flow.
Certain measures to boost domestic purchasing power through the fabrication of employment and wage opportunities
are of critical importance because labor income is one of the most important source of domestic purchasing
competency. For example, some policy measures concern incomes and employment policies, such as the
implementation of a legal minimum wage complemented by enhanced public employment, and systematic
adjustments of wages in line with the economys average productivity growth.
Another way to look at it is an increased household consumption will induce product revolution and investment in
productive market. The higher the investment, the higher the employment and wage opportunities, thereby boosting

domestic purchasing capacity, as well as tax revenue for government consuming. And productivity gains resulting
from supplementary investment will allow for further increases in wages and consumption.
Although there are certain factors that influence the continuity of this flow and they are:
1.
2.
3.
4.
5.
6.
7.

Interest rates (inversely proportional to the consumption expenditure)

Consumer confidence (directly proportional)
Physical wealth (inversely proportional)
Financial wealth (directly proportional),
Rising inflation (directly proportional ; as the household tends to buy more today)
Increased taxes (inversely proportional)
Income ( more the income, the more the consumption expenditure)

These contractions can be countered by the introduction of the following:

Expansionary fiscal policy: This is an increasing government purchases or decreasing taxes. Increased spending by
government can stimulate the business sector to manufacture more output and recruit more employees.
These employees then have more income to spend on other goods, which again stimulates more production,
employment and income, and which can then stimulate the economy out of a contraction. Government can
also decrease taxes, which leaves more spendable income in the hands of the consumption-spending
household sector. When consumers buy more output, business hire more employees. Once again, this can
stimulate the economy out of a contraction.
Expansionary monetary policy: which is an escalating in the amount of money in movement and a correlating
reduction in interest rates. With more money, households and business are able to spend more, buy more
production, and counter the contraction. Along with the increase in the money supply, interest rates generally
decline, which encourages expenditures made by borrowing. In both case, the economy can be stimulated out
of a contraction.

Cons are:
1. People might over spend
2. Commit to consumption out of their reach
3. Inflation
4. Depts
5. Exacerbating inequalities
As economy slows down because of external factors the bubble which might get created might burst and result in
foreclosures and bad debts - again we have the example of USA in the recent recession that hit it.
Consumption expenditure is an aid rather than a purpose for triggering economy growth. China had depended too
much on the investments for a long time; it is high time for the policymakers to change the strategy to transform the
economy. So it is a good thing for country like China that their economy is led by consumption rather than
investments. Which means a better standard of living than before. Most consumption come from the government and
many people cannot feed themselves.
Although the main problem is Inflation and it should be controlled by contractionary fiscal policy, so there should be a
decrease in government purchases, an increase in taxes. There should also be a monetary policy which focuses on a
decrease in money supply and an increase in the interest rates.

A consumption-led economy has its own pitfalls. It is based on loans and bonded future income; the government
should educate the people on the balance between their savings and borrowings. The expanding consumption should
also avoid damage, offence and pollution. A combination of consumption-led and investment-led growth strategy
should be applied where it is needed.