Question

• It is customary for the News media to report about consumer confidence and investor confidence while discussing the national economy. How do you think the confidence of the economic agents affect the economy? From personal or work experience, state factors that could cause increase in consumer spending and investor investment. Do consumer and investor confidence trend reports affect your spending pattern? Explain.
• The government purchases component of GDP does not include spending on transfer payments such as Social Security. GDP does not also include the value of used goods that are resold. Do you think such exclusion make GDP a less informative measure of economic well-being? What other production of goods and services do you think are excluded from the GDP? What is the impact of such exclusion on the economic welfare?

Answer 1

• Consumer confidence is an important economic indicator as it reflects the confidence level of the consumers about the overall economy. In addition to that it also reflects the consumers confidence about his/her own income stability. It is important as it informs people about their economic decisions majorly their  spending.

Investors confidence is related to the investors willingness to engage in an investment opportunity available to them taking into account the risk and returns associated with it. As the business cycles of an economy change, there is change in the investors confidence which further impacts the economy.

Thus it is important to look and both the type of confidence levels in the economy so that a clearer picture of the market is known and the confidence levels indicate how the consumers and the investors will react to changes in the economy.

Increase in consumer spending: If there is increase in the income of the consumers or there is fall in the price of certain commodities then the spending of the consumer will increase as can buy more of the good. Also, if the consumer feels that the market is in good condition and that he will gain profit and maximize his/her utility, the consumer would be willing to spend more.

Increase in investor spending: If there are long term positive returns on an average for an investment opportunity or there is a fall in the interest rate or increase in the autonomous income will lead to increase in investment spending.

Yes, consumer and investor confidence trend reports do affect our spending pattern. It is so because as there is change in the trends of any of the two, there will be a change in the market conditions and this will lead to change in the spending from our side. We at times might behave as consumers and at times as investors and thus any action taken by us will ultimately affect the economy and our spending nature.

• Gross Domestic Production (GDP) represents the total production of goods and services withing a nations boundary.

Spending on transfer payments as securities by the government are not included in the GDP as they are payments in return of which no service has been rendered. There is no production in return of which these payments are made hence they are not included in the calculation of the GDP. Because the GDP  includes the production of goods and services and since these payments are not associated with any good or service production, even if they are included in the GDP that does not make GDP a less informative measure of  economic well-being. Also as the resold goods account for double amount i.e. the cost of the good is accounted for twice if it resold; it accounts for the problem of double counting if it s added in the GDP. GDP doesn't include the value of a good twice and hence it is apt to include the value of resold good in the GDP.

• More things that are not included in the GDP are goods produced outside the nation boundary. Not including it in the GDP is justified as it is not produced within the nation and hence shall not be included in this countries GDP calculation.

Another thing not included in the GDP are the values of the intermediate goods and this is because the values of those goods are included in the final value of the good and if the values of intermediate goods are included they will lead to the problem of double counting.

Not including these in the calculation of GDP doesn't impact the economic welfare as they are not counted for as the final product and hence do not account for the part of the GDP.