Question

Which statement is true? (LO6) a) Consumption spending accounts for about 60 percent of our GDP. b) The basic long-term trend in consumption spending as a percentage of GDP has been downward. c) The wealth effect accounts for some additional consumption when people perceive themselves to be wealthier. d) Were it not for the wealth effect, most Americans, especially those who owned homes and corporate stock, would have cut back on their consumption even more, making the Great Recession more severe.

Short answer

The true statement is: c) The wealth effect accounts for some additional consumption when people perceive themselves to be wealthier.

Step-by-step solution

Analyzing Statement A

Statement A claims that consumption spending accounts for about 60 percent of our GDP. This percentage might vary from year to year and country to country. Generally, consumption spending is one of the largest contributors to GDP in most countries. However, to determine if 60 percent is accurate, we would need more information or data about the specific country and year. As such, we cannot conclude whether this statement is true or false.

Analyzing Statement B

Statement B asserts that the basic long-term trend in consumption spending as a percentage of GDP has been downward. In general, consumption spending as a percentage of GDP can either increase or decrease depending on factors such as economic growth, consumer confidence and government policies. Based on this statement, it is tricky whether the long-term trend has been moving downward. Therefore, we cannot conclusively say if this statement is true or false.

Analyzing Statement C

Statement C states that the wealth effect accounts for some additional consumption when people perceive themselves to be wealthier. The wealth effect is a well-established economic phenomenon where people increase their consumption based on an increase in their perceived wealth. This could be due to a rise in the value of their assets, such as property or investments. As a result, this statement is true.

Analyzing Statement D

Statement D suggests that if not for the wealth effect, most Americans, especially those who owned homes and corporate stock, would have cut back on their consumption even more during the Great Recession, making it more severe. The wealth effect might have played a role in preventing the Great Recession from becoming even worse. However, it was not the sole factor determining consumption levels during that period. Other factors such as government policies, consumer confidence, and global economic factors also played a role. Therefore, it is difficult to assert the complete truthfulness of this statement. In conclusion, based on the analysis of each statement, the true statement is: c) The wealth effect accounts for some additional consumption when people perceive themselves to be wealthier.

Key concepts

Consumption Spending

Consumption spending refers to the amount of money spent by households on goods and services. It constitutes a significant portion of a country's Gross Domestic Product (GDP), often exceeding 60% in many developed economies.
This spending is crucial because it reflects the economic activity within a nation. When households spend more, businesses thrive, leading to job creation and further economic growth. However, if consumption spending declines, it can signal an economic downturn.
Influencing factors include:

• Household income and savings
• Consumer confidence and willingness to spend
• Interest rates and credit availability

These elements combined dictate whether consumption spending rises or falls, impacting the overall stability of the economy.

GDP

Gross Domestic Product (GDP) is a comprehensive measure of a country's economic activity, representing the total value of goods and services produced over a specific time period. Consumption spending, investments, government spending, and net exports are its main components.
GDP is often used as a benchmark for a country's economic performance. A rising GDP typically indicates economic growth and prosperity. Conversely, a declining GDP suggests economic challenges or recession.
Measuring GDP helps policymakers make informed decisions on fiscal and monetary policies. It serves as an indicator for living standards and helps compare economic health between countries.
Understanding GDP is crucial when analyzing economic phenomena and changes in consumption spending as it influences and reflects broader economic trends.

Great Recession

The Great Recession was a severe worldwide economic downturn that occurred from late 2007 to mid-2009. Triggered by the collapse of the housing market in the United States, it led to widespread financial instability globally.
The recession resulted in high unemployment rates, plummeting stock markets, and significant declines in household wealth and national GDPs. Consumption spending fell sharply as consumers cut back due to uncertainty and loss of wealth.
Some key responses included massive government interventions and stimulus packages aimed at stabilizing financial systems and restoring consumer confidence. It highlighted the crucial role of consumption and the interconnectedness of global economies.
The wealth effect, which allows individuals to spend more as they feel wealthier, was lessened, making recovery more challenging during this period.

Economic Phenomena

Economies are complex systems that are influenced by numerous interrelated phenomena. These include inflation, unemployment, fiscal policies, and international trade. Each plays a significant role in shaping overall economic performance.
The wealth effect is one such phenomenon where increases in individual wealth can lead to higher consumption spending. It demonstrates how personal financial perceptions impact broader economic activities.
During economic downturns like the Great Recession, various phenomena such as decreased consumer spending, tighter credit conditions, and increased savings rates become more evident.
Economic phenomena also cover trends in technology, market dynamics, and cultural shifts, all contributing to the evolution of consumption patterns and economic development.
Understanding these processes is essential for comprehending how global and local economies navigate challenges and opportunities over time.