The wealth effect is an economic term, referring to an increase in spending that accompanies an increase in perceived wealth.[1]
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Effect on individuals
The effect would cause changes in the amounts and composition of consumer consumption caused by changes in consumer wealth. People should spend more when one of two things is true: when people actually are richer (by objective measurement, for example, a bonus or a pay raise at work, which would be an income effect), or when people perceive themselves to be "richer" (for example, the assessed value of their home increases, or a stock they own has gone up in price recently).
However, according to David Backus, an NYU economist, the wealth effect is not observable in economic data, at least in regards to increases or decreases in home or stock equity.[2] For example, while the stock market boom in the late 1990s (q.v. dot-com bubble) increased the wealth of Americans, it did not produce a significant change in consumption, and after the crash, consumption did not decrease.[2]
See also
References
- ^ Jelveh, Zubin. "In Praise of the Wealth Effect - Economics Blog - Zubin Jelveh - Odd Numbers - Portfolio.com". portfolio.com. http://www.portfolio.com/views/blogs/odd-numbers/2008/06/17/in-praise-of-the-wealth-effect. Retrieved 2009-04-20.
- ^ a b Flavelle, Christopher (2008-06-10). "Debunking the "Wealth Effect": Declining house prices don't necessarily slow down consumer spending.". Slate. http://www.slate.com/id/2193287/.
External links
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