From the above mentioned situation we can tell that as households start to spend more, an effect is experienced on all the major aspects of an economy. Other than the flow of money becoming faster, as a result of consumers spending in higher amounts, the manufacturers and firms start to earn higher profits. This leads to expansion of businesses, venturing for operations into newer areas as mentioned about electronics manufacturers in the article. Also firms which are already enjoying economies of scale, will try and channelize more money into acquisitions and mergers, which will create more stable firms (in the general case), and thus providing more job security to workers, which will in turn benefit the economy. This leads to higher employment, as in order to expand, firms need more labor. As a result, there will be more money in the hands of the citizens of the country, which in this case is Japan, and a higher purchasing power. Also this higher purchasing power and a greater amount of money in the hands of the citizens will lead to the greater flux of money into such institutions such as banks and investment firms. Consequently government income which is derived from taxes will rise, due to more citizens coming into the tax payment eligibility bracket. More money will be spent in the global sector, as quantity demanded of imported goods and services rises, and exports by expanding firms also steps up.
Aggregate Demand is total planned or desired spending in the economy during a given period. It is determined by the aggregate price level and influenced by domestic investment, net exports, government spending, the consumption function, and money supply.
AD = C + I + G + (X-M)
As is delineated in the article, there is an overall increase in consumer expenditure. Here we see that such a situation will increase Aggregate Demand. We have discussed above how an increase in consumer expenditure is leading to an increase in Capital Spending (Investment), and Net Exports. As aggregate demand increases, the government will feel strengthened, and gain confidence in investing money into public institutions and infrastructural development projects, consequently beefing up government spending figures.
Gross Domestic Product (GDP) is the value at current market prices, of the total final output produced inside a country during a given period. Since from economic theory we know that Aggregate Demand is numerically equal to GDP, it is imperative that with an increase in aggregate demand, GDP will rise, and since economic growth is defined as an expansion in the country’s potential GDP or national output, such a case explains why Japanese economists are relieved with consumers spending the extra buck. As can be inferred from this, the per capita income figure for Japan will eventually rise, and the standard of living will ameliorate. GDP per capita is the number which is calculated by dividing the latest population estimates by the GDP for a particular year. Depending on the approach taken to calculate GDP, annual income, expenditure, or total value of the goods produced can be determined per person in the country.
As the Aggregate Demand of the economy grows, it moves closer to achieving its Potential GDP. A graphical representation of such a situation is shown below:
The graph reiterates above, that the Aggregate Demand of the Japanese economic activity is bound to grow with a spur in consumer expenditure. As this leads to an expansion in Aggregate Demand, the Japanese economy will move closer to its potential GDP mark. Even as price levels rise, it becomes better for the economy because the recessionary gap which was created previously because of consumers tending to save more than spend will be covered. Producers will benefit from such an increase, because they will incur higher sales. The government will view the AD moving to AD1, closer to the potential GDP mark as a good time to beef up public spending to further aggrandize the good economic activity.
The extra spending by Japanese consumers is a resuscitation act for the Japanese economy. As explained above, it will lead to an overall growth in the form of increasing GDP. This is an indicator of improving standards of living, and a healthy purchasing power for the consumers. Producers will benefit due to higher sales, and even the government will show more confidence in its public spending ventures.
Bibliography
Hashim Ali, Comprehensive Economics Guide, Oxford University Press 1999
John Sloman, Economics, Prentice Hall 2000
Kae Inoue, Issei Morita, July 24th 2004. “Corporate Japan says consumers will drive economic recovery”. 25th July 2004.
