Wealth Effect
The wealth effect is an economic theory that suggests that an increase in an individual’s net worth will lead to increased consumer spending. This theory is based on the idea that when people feel wealthier, they are more likely to spend money on luxury items, such as cars, vacations, and other big-ticket items. The wealth effect is often used to explain why consumer spending increases during periods of economic growth and decreases during periods of economic recession.
History of the Wealth Effect
The wealth effect was first proposed by economist John Maynard Keynes in 1936. Keynes argued that when people feel wealthier, they are more likely to spend money on luxury items, which in turn stimulates the economy. This theory has since been used to explain why consumer spending increases during periods of economic growth and decreases during periods of economic recession.
Comparison of Wealth Effect
| Economic Growth | Economic Recession |
|---|---|
| Increased consumer spending | Decreased consumer spending |
| Increased net worth | Decreased net worth |
| Increased luxury spending | Decreased luxury spending |
Summary
The wealth effect is an economic theory that suggests that an increase in an individual’s net worth will lead to increased consumer spending. This theory is based on the idea that when people feel wealthier, they are more likely to spend money on luxury items, such as cars, vacations, and other big-ticket items. For more information about the wealth effect, you can visit websites such as Investopedia, The Balance, and The Economist.
See Also
- Consumer Confidence
- Inflation
- Interest Rates
- Monetary Policy
- Recession
- Savings Rate
- Stock Market
- Unemployment Rate
- Economic Growth
- Gross Domestic Product (GDP)
