Relationship among Investment, Consumption and Growth (Essay Sample)
The instructions of this paper required one to research on the relationship among investment, consumption and growth. Therefore, the sample details on the roles played by consumption and investment towards GDP growth rate derivations. It also expounds on the factors that are used in determining the amount of investment expenditure as well as consumption expenditure. It further expounds on the methods employed in calculating changes in consumption and saving.source..
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Relationship among Investment, Consumption and Growth
â€œOne of the crucial areas of economics is the study of the relationship among investment, consumption and growthâ€ (Bao et al, 287). Just like Bao et al, Jorgenson (274) also argues that â€œthe overall product of a given economic system comprises of investment in both human and non-human capital and consumption of market and non-market goods and servicesâ€. From the definitions provided above, it is evident that consumption and investment play significant role towards GDP growth rate derivations. For an economy to balance, funds opt to be allocated properly between investment and consumption. Overreliance in one side often leads to complications. For instance, if a lot of funds are allocated to investment alone, consumption will automatically lag behind. Unfortunately, the lagging behind of consumption is often associated with low demand, a de-motivating factor for any increase in productivity. Thus, it is crucial for both consumption and investment to be given equal importance.
Various factors are used to determine the amount of consumption expenditure; some of them include the level of disposable income, availability of credit, and expectations. Wealth, interest rates, stock of durable consumer, and income distribution also play a significant role in determining consumption. â€œFor instance, good credit conditions often favor consumer spending whereas, low interest rates stimulate consumer spendingâ€ (Bao et al, 289). Additionally, consumer spending is also affected by not only expectation of future changes in price, but also the existing stock of long-l...
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