How consumer spending will affect the economy?

Answer 1

Very adversly! Reduction in cosumer spending can bring by a recession. If people spend less, there will be less demand for goods and services. With demand, production will be decreased. When production is decreased, cost-cutting measures will be implemented. People are laid-off, the economy detracts. Consumer spending is the back-bone of capitalist mixed-economies such as that of the US.

Answer 2

In a typical 4-sector economy (picture a circular flow), you have sector 1: The Household, which provides the factors of production of Land, Labor, and Capital to sector 2: The Firm. In return, the firm provides the household with wages. These wages are then spent in the marketplace as consumption of durable and non-durable goods.

Some of the money spent is collected as tax revenue and goes straight to Sector 3: The Government. However, a consumer never spends their entire income in the marketplace due to their marginal propensity to save, so a proportion of household income is placed into sector 4: Financial Institutions.

Consumer spending therefore affects two major parts of a typical economy; if consumer spending is damaged, less tax revenue will be collected and less money will be placed into banks. This further affects the economy in two ways. Firstly, the government has less money to spend on projects such as infrastructure and education. Secondly, banks cannot readily lend funds to other consumers to allow them to make large purchases. In extreme cases if the government is unable to generate enough tax revenue over time they may default on their debt, and banks may collapse due to a lack of assets versus liabilities thus causing a panic and possible future bank runs.