Deciding which is the ideal consumption level as percentage of the GDP .


Basically we can all agree in that an economy GDP is the sigma of consumption , investment and external trade .

External trade should include goods , services , labor and money flows , but we can simplify it into goods and services for our arguments , while keeping in mind that current status of global economy can be considered as globally open .

What you can spend without generating an out of control indebtment should be in line with the added value or richness generated by the economy .

Essentially there are two points you should consider . Too big an impact of consumption in the GDP will make it difficult to compensate with the added value generated by investments which should make up for consumption as well as for enough competitiveness to balance adequately external trade of goods and services . Besides excessive consumption will favor inflation wich has a negative effect in purchase power and accelerates indebtment while further deteriorating competitiveness .
If consumption is too low and economy relies mainly on exports with very high added value and competitiveness the risk in a global economy is that you will depend too much on international demand .

So wether consumption is too high or too low , the deviation from the optimum percentage of the GDP , will force the economy sooner or later into unemployment and deflation . Al though the path in each case would be of course different .

Perhaps we should recall here once again that the equilibrium between offer and demand is in fact what we have to care for and that competitiveness ( type of investment ) and purchase power are paramount in that contest .
Also for the sake of rationalisation it helps to clarify that added value is not just profit . Added value is the consequence of a type of investment that will generate an output strongly demanded at world level with such technology and competitiveness that the labor needed is sufficiently qualified to enjoy incomes high enough to guarantee a healthy and durable consumption ( demand ) , while allowing for healthy corporate profits .

In conclusion the choice of the right value of consumption as a percentage of the GDP is paramount in the future health of the economy .

The instruments for achieving that , are obviously tax and credit policies that will stimulate the economy in a convenient direction as a function of global economic situation at any time .

In my opinion the right percentage of consumption should be 65 % of the GDP for a healthy developed economy .

Brahmason

Brahmason@gmail.com

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Published in: on marzo 3, 2013 at 1:15 pm  Comments (32)