Growth and its means

A well developed economy is a brand of Consumption Driven Economy. Consumption increases productive activity through creation of demand for which supply has to be met. For one to understand how to create a wholly consumption driven economy, understanding how to reduce consumption is very important factor. Consumption can be currently reduced by dis-incentivizing or postponing to a later date by incentivizing through future returns. The latter is an explicit answer to the postulate. Further discussion of this topic is based on the former postulate of reducing current consumption.

Goods that are consumed can be categorized as basic /necessity goods, normal goods and luxury goods. The proportion of spending on necessity especially food, decreases as the disposable income of an individual is higher on the scale. If people have income, dis-incentivizing cannot be made effective to make them reduce the consumption of goods for their basic needs. So, disposable income becomes the main criteria for a consumption driven economy.

The demand for normal goods decrease as the utility becomes lesser than the cost of the goods. Facile transportation has lead to great economic activity and as we understand, has shrunk the world. Increasing the transportation cost both at the fuel and taxes fronts, will lead to lesser mobility and in turn, lesser consumption. These should include shipping cost, air, road and rail freight charges that a company incurs and also the private/public transport charges that a commoner has to spend. Increasing the supplier power by encouraging cartel formation can also lead to reduced consumption as OPEC is a fine example in the manipulation of supply with regard to demand. Sustainability of these cartels depends on the importance of the goods produced for a consumer.

In case of luxury goods, one should think of dis-incentivizing the producer but not so much as to stop his productive activity. This can be done by increasing the raw material cost which will lead to decrease in quality of goods produced. Since the marginal utility of the item gets reduced the propensity to consume also reduces. This concept is not sustainable in the long run as it has the potential to put the firms out of business which will reduce the economic activity. This phase of high cost of raw material can be countered by the producers through improvement in operations through technological changes.

All the measures stated about will finally reduce the spending capacity of an individual which will decrease the growth of a Nation in the short run. Consumption is the essence of a Nation’s growth: fluctuations in the consumption pattern will lead to reduced prosperity for an economy. Understanding these measures will help us understand growth and how to achieve it.