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Posted 06/29/2020 in Category 1 by Breaie

Economics For Beginners.

Economics For Beginners.

Consumer spending and consumer purchases.  What are the differences? 

Here are the explanations that I found online. Certain purchases keep the money in the local economy where the money is spent and helps spur economic growth in that local economy which makes that local economy stronger.

A different type of purchase results in the money spent on an item purchase to leave the local economy and frequently the country the money was spent in.

Here is a better explanation. 

Retail sales they state are an economic indicator of the economy because consumer spending drives much of the US economy.  These sales consist of sales of services and non durable goods in a specific time frame.  

The US Census Bureau states that nearly 70% of of the GDP of the US is from consumer spending.  Again, let me repeat that retail sales is an economic indicator of the US economy.  

The definition of GDP  means gross domestic product.  GDP is the total value of goods and services produced in a country.  Let me restate this last sentence again.  The GDP is the total value of goods and services produced in a country.  Now let's peek at the GDP of the US economy is nearly 70% retail sales, so the remaining 30% of the GDP is from goods and services produced at home in the USA.  

If we really look at the definition of GDP, we can easily see by the numbers that the USA is a consumer based spending economy.  Only around 30% of US GDP is producing a product or service, the rest of the economy is based on nearly 70% is retail spending.   How sustainable is that type of economy?

These facts are backed up in previous decades where the retail spending was less than 10% of the GDP and the remaining 90% or higher depending on the years the US was producing some product  and service and in the middle of the twentieth century economy of the US was much stronger economically than now.

These numbers indicate a void in our current economy.  We do not manufacture our own products in sufficient numbers anymore. Manufacturing is just a term for making a widget.  Widget is some product that is made for resale. 

Anyone should be able to see the void in our current economy with out my paraphrased explanation of GDP and what has been reported in the news recently.  There are a lot of potential for the right entrepreneurs to step into this area to start up manufacturing in their respective home countries and secure the country's  independence and security on foreign made goods.  

The recent events have clearly shown us that every country is risking their national security by being to dependent on other countries producing their products to purchase for import.  We are seeing the logistical issues now with shortages and rising prices for products that are in huge demand.  Some countries are keeping their products for their nation during these times. I'm sure we will see more breaches show up as we continue to go through the second wave.    

Let's break down what happens when a consumer spends their hard earned money on a purchase so this can make more sense.

A consumer needs to consider how their purchase will impact the local economy, State economy, as well as their country's economy where the consumer resides over the long term.

Here are examples of how money spent on purchases and where the money goes:

A consumer realizes they need new flooring in their home.  This work includes ripping up the old carpet and padding in the house for disposal.  New tile and hardwood floors will replace the old worn out carpet.The flooring and tiles are all made in the USA.  The local store will make a sale on tile, hardwood flooring, delivery fees to deliver the ordered items, as well as other needed items to install this new flooring in the home of the consumer. The flooring contractor makes money from hauling out the old padding and carpet from the house, installing new flooring in the home.  The dump makes some fees from contractor for dumping old carpet and padding in the landfill.  This service provides the homeowner with new flooring that is easier to keep clean and makes the home more attractive on the inside.  The value of the home increases which in turn helps to keep the property values up in the homeowners' neighborhood.  All of the money spent by the homeowner remains in the local economy where the homeowner lives.

Another consumer decides to put a down payment on a new Hyundai car purchase. Hyundai motor company is a South Korean multinational car manufacturer.  The parts and the building of the car is done outside of the USA. Can you now guess where the majority of the money goes from the car purchase? A small percentage of the money  stays in the local economy from taxes levied on purchase.  The rest of the money flows overseas.

The third consumer decides to make a purchase online and buys a product made in China and shipped from China. All of the money spent on this online purchase flows overseas to China. Zero dollars stay in the local community's economy.

How and where money is spent matters a great deal to everyone's local economies/communities, State, and country.

Think about this informative article the next time you consider making a purchase.  Where will the money flow and who will the money enrich.  Very important component of economics.

Another component that is rarely mentioned is the importance of saving money for a balanced personal economy and the economy of your country. Don't listen to the hype that consumers have to spend or go into debt to keep the economy afloat.  Consider your pwn personal financial economy first.

An economy can't remain viable for long based on using more than it makes.

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Thank you Pixabay and the creator for the picture.

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