It might not always seem like it, but individuals have a pretty significant impact on the economy. Many factors influence the economy, including consumer spending, global trade, business investment and government policy. In terms of demand for consumer goods, prices, inflation, interest rates, employment levels, wages and consumer confidence all play a key role as well. As these factors change, so too does the economy.
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To find out how much impact individual decisions have on broader economic outcomes, GOBankingRates spoke with Dennis Shirshikov, a finance and economics professor at the City University of New York, as well as the head of growth at GoSummer.
Here’s how much impact you have on the U.S. economy as a consumer.
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Impact of Consumer Behavior and Demand
“Individuals absolutely have an impact on the economy, both directly and indirectly,” said Shirshikov. “On a direct level, every purchasing decision, investment choice and even employment move contributes to the aggregate demand and supply that shape economic outcomes.”
Let’s break this down further, starting with purchasing decisions.
Purchasing Decisions
Consumers make decisions about what they want to buy — and what they don’t — nearly every day. These decisions are based on a variety of factors, including whether or not the current prices of goods and services are acceptable.
If an individual chooses to purchase something at its current price, that lets businesses know that there’s value in that thing. The opposite is also true. In both cases, businesses will compete with one another to provide these goods and services in a way that will continue to attract consumers while generating profits.
Of course, not everything will change in price based on demand. Nor will demand always drop because of current prices. Things like prescription medications tend to remain in high demand even if prices are also high. These types of goods are considered “inelastic.”
It’s also worth noting that consumer demand can affect not just pricing but also inflation. Inflation is essentially the increase in prices of everyday goods and services, largely measured by the consumer price index (CPI). The current annual inflation rate in the U.S. for the 12 months ending in July 2024 is 2.9%.
The greater the demand for services and goods, the more prices tend to rise — thus higher inflation rates. But again, when demand drops, prices often do too — aside from inelastic products. This can also influence inflation rates.
Next up is investment choice, which is also tied to consumer confidence.
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Investing Decisions
When individuals have faith in the U.S. economy, they’re more likely to invest in financial products like stocks and bonds. This can generate more capital for businesses, which in turn allows them to continue to grow and thrive. On the other hand, less consumer confidence — and therefore fewer investments — can result in an overall economic decline.
Consumer behavior — that is, how they choose to spend or not spend their money — can also impact industry trends. If, for instance, more people are spending their money on environmentally friendly or sustainable brands and products, it can spur growth in these areas. At the same time, it can have an adverse effect on more traditional products or declining demand for these brands and companies.
And then there’s employment and wages/income. These can have a direct effect on the economy, as well as an indirect effect.
When unemployment rates are low and wages are relatively high, more people are willing to spend money. This is especially true when they anticipate that they’ll continue to receive steady income for the foreseeable future.
But when unemployment rates are high, or there are concerns about a recession or other downturns in the economy, spending tends to dip — and economic growth tends to slow. This can also affect businesses, which may have a ripple effect on industry jobs — particularly if those businesses end up creating more jobs or terminating existing roles to manage expenses.
As indicated in a U.S. Bureau of Labor Statistics article about the 2007-2009 recession, “U.S. consumers have been considered an ‘engine’ of economic growth in the United States…When consumers shop, they directly support jobs in companies that produce, transport and sell final goods and services.”
The article went on to say, “Consumers also indirectly support jobs that make inputs (intermediates) requisite for final production. More U.S. jobs directly or indirectly relate to consumer spending than to all other sectors of the economy combined.”
Impact on Economic Policies
“Consumer spending is often the most immediate and visible driver of economic activity, as it directly affects demand for goods and services,” said Shirshikov. “Indirectly, individuals also influence the economy through their collective behavior, which can drive market trends, affect interest rates and even sway government policies.”
The U.S. government will often introduce new policies to either encourage or discourage consumer behavior, depending on its goals. Take the clean vehicle tax credit for EVs as an example. Those who qualify can receive up to $7,500 toward their electric vehicle as a tax credit. This incentivizes more people to purchase energy-efficient vehicles.
“Government policy, particularly in the areas of taxation and regulation, can either stimulate or stifle economic growth,” added Shirshikov.
Bottom Line
Ultimately, quite a few factors affect the U.S. economy, including consumer behavior, demand, investment decisions, consumer confidence, wages and employment. During times when consumer confidence is high, the economy’s overall health can benefit — indirectly and directly. When demand drops, pricing sometimes falls as well, but economic growth can also slow.
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This article originally appeared on GOBankingRates.com: I’m an Economist: This Is How Much Impact You Have on the Economy
