This question was originally posed in our forum and reposted here.
Pardon my knowledge…. but my math is:
avg income=expenditure = multiplied by population makes a economy
So for example USA —-$35,000 X 300 million
Why can’t China and/or India create the same scenario?
This is really a question about production and earnings. If you have a billion people you have people resources, but if they aren’ tbeing productive then it’s pointless (if 90% live in rural areas and don’t contribute very much to the overall GDP).
An economy involves far more than expenditure. In your example, there is an assuming that all of the avg. incomes will be spent towards consumption, and that’s the only money available to the system. (Also, India may have 1 billion people, but each household has a fraction of the avg American incomes).
In actuality an economy is based upon a number of things.
For individual countries a number of factors are taken into consideration including avg income, dollars coming in (investment, purchase of exports), dollars going out (importing, borrowing).
We also have to consider the fact more people rather use the greenback (US dollar) as their vehicle currency meaning more people are willing to invest in America, buy their assets/outstanding debts, lend them money, etc., rather than countires with developing economies like India and China.
Some would also say the india and china have larger economies based on size, far more people are involved, however, many are restricted to smaller enterprises in developing countries to such ventures as agriculture. The fact is, as india and china grow, they’ll get stronger, and eventually demand just as much as americans do.
Americans love to consumer, and people love to send their money there, so it’s not a matter of people, but where those with money send it 😛 Hope that helps, let me know any more questions you may have.
thanks for the insights……i was aware of those things….but they were not part of the picture in my mind…
so if china or india….
1. have better income than now….and they all spend it….just like americans do
2. people from other part of the world invest in these new economies just like they invest in america
3. i am not sure the india/china currency will be used as a base currency by others…….so this is ruled out
the theory that i am trying to clear…..is that…….theoretically………if we give double salary/income to everyone………and they all spend it………will that mean a better economy………since consumption has doubled…..
if consumption is a major factor…..that means……china and india definitely have a good chance of growing bigger and bigger…..
but is it possible to implement this theory in practice……….like encourage people to spend rather than save……if the government gives the people enough backup in case of personal misfortune…..people will not save much, right?
ight now americans are doint exactly what you are saying, spending more than they have. They are in debt, is the economy stronger because of it? I wouldn’t say so, they have a HUGE deficit to take care of.
About your other question. If you gave everyone an extra 1million to spend would that make the economy better off? Absolutely not! Firstly, that 1 mill has to come frmo somewhere, if it’s the employers (the most likely place) then salaries increase meaning prices of goods increase. Inflation would off set any increase that everyone else experienced. Nobody is better off if everyone gets the same amount.
Secondly, the bank could just print more money, but then again, inflation problems, too much money in the system devalues the currecny.
Don’t get me wrong, consumer spending is very important, however, giving more money to people who already have it and spend it doesn’t not necessarily help the economy. Reducing interest rates to encourage spending does help under the right conditions.
thanks again for this 101 in economics…
my knowledge is pretty limited…so when i say “better economy”……..it usually means better wages…leading to more money in most people hand….leading to more spending…….more revenue for the government in form of taxes……surplus everywhere….
so it seems that USA economy looks good for now….but because of their debt….
1. either they declare bankruptcy and the lendors will suffer (non usa)
2. or they will have to keep servicing this debt and hence their economy will be sluggish since they will not have much money to spend.
on other note….it looks to me that the clearest factor which can grow the economy is “consumption”…….because if we consume more it will lead to more production…..which means new jobs being created….
if above is true…..then india and china maybe on the way to a bigger economy because they have started to consume more than the past (more automobile, fuel, electronics etc…)
sorry if i dont make much sense..
Consumer spending is huge yes, however, you can’t push it by ‘giving’ people more money. That’s a quick boost if you can do it, but you can NEVER do it by just giving ppl money you’ve printed. PPP = purchasing power parity. If everyone is given 10000 from nowhere then nobodies Purchasing Power goes up.
You get people to spend more by lowering interest rates, at least right now that’s the biggest way. As well, consumer confidence is up there, lower interest rates mean nothing if ppl are afraid of terrorists 😛