Consumer led recovery and investment led recovery

Readers Question: What is the difference between Consumer led recovery and investment led recovery

In this instance recovery refers to the economy coming out of recession. It means the economy starts to have positive economic growth. Economic growth can be caused by various factors see causes of economic growth.

Consumer led growth means that consumer spending is the main cause of rising aggregate demand and economic growth.

Consumer spending accounts for 66% of AD. Rising consumer spending may lead to an increase in imports and possible current account deficit. In the long term there is more chance that consumer led recovery will cause inflation. However, if the economy is recovering from recession there is likely to be spare capacity in the economy.

Investment led recovery means that firms are investing in new capital. They will employ more workers and reduce unemployment. Investment led growth will increase Aggregate Demand and increase productive capacity. It means that Aggregate Supply will rise. This leads to long term improvements in the economy. Living standards may not rise immediately because consumer spending doesn’t rise that much. However, in the long term the economy may be stronger than if it had been consumer led.

By on April 23rd, 2008

One thought on “Consumer led recovery and investment led recovery

  1. Pure investment led recoveries are difficult to achieve successfully because (1) investment is normally a much smaller portion of aggregate demand than consumption and (2) most businesses are understandably reluctant to deploy capital while consumer demand is weak. Probably, where investment successfully takes the lead government temporarily takes the place of the missing consumer with infrastructure, internal administrative and defense spending, otherwise promotion of investment by such means as tax breaks and monetary easing would have the effect of “pushing on a string”.

    The end of production is consumption and no recovery is real until consumption recovers.

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