The
wealth effect is an economic term, referring to an increase in spending that accompanies an increase in perceived wealth.
The effect would cause changes in the amounts and composition of
consumerConsumer is a broad label for any individuals or households that use goods and services generated within the economy. The concept of a consumer is used in different contexts, so that the usage and significance of the term may vary....
consumptionConsumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally consumption is defined by opposition to production. But the precise definition can vary because different schools of economists define production quite differently...
caused by changes in consumer
wealthWealth is an abundance of valuable resources or material possessions. The word is derived from the old English wela, which is from an Indo-European word stem...
. People should spend more when one of two things is true: when people actually
are richer (by objective measurement, for example, a bonus or a pay raise at work, which would be an
income effectIn economics, the income effect is the change in consumption resulting from a change in real income.-Consumer Theory:Another important item that can change is the money income of the consumer. The income effect is the phenomenon observed through changes in purchasing power...
), or when people perceive themselves to be "richer" (for example, the assessed value of their
home increasesReal estate pricing deals with the valuation of real estate and all the standard methods of determining the price of fixed assets apply....
, or a
stockIn the investment world, a share of stock represents a share of ownership in a corporation ....
they own has gone up in price recently).
However, according to David Backus, an NYU economist, the wealth effect is not observable in economic data, at least in regards to increases or decreases in home or stock equity.
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The
wealth effect is an economic term, referring to an increase in spending that accompanies an increase in perceived wealth.
Effect on individuals
The effect would cause changes in the amounts and composition of
consumerConsumer is a broad label for any individuals or households that use goods and services generated within the economy. The concept of a consumer is used in different contexts, so that the usage and significance of the term may vary....
consumptionConsumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally consumption is defined by opposition to production. But the precise definition can vary because different schools of economists define production quite differently...
caused by changes in consumer
wealthWealth is an abundance of valuable resources or material possessions. The word is derived from the old English wela, which is from an Indo-European word stem...
. People should spend more when one of two things is true: when people actually
are richer (by objective measurement, for example, a bonus or a pay raise at work, which would be an
income effectIn economics, the income effect is the change in consumption resulting from a change in real income.-Consumer Theory:Another important item that can change is the money income of the consumer. The income effect is the phenomenon observed through changes in purchasing power...
), or when people perceive themselves to be "richer" (for example, the assessed value of their
home increasesReal estate pricing deals with the valuation of real estate and all the standard methods of determining the price of fixed assets apply....
, or a
stockIn the investment world, a share of stock represents a share of ownership in a corporation ....
they own has gone up in price recently).
However, according to David Backus, an NYU economist, the wealth effect is not observable in economic data, at least in regards to increases or decreases in home or stock equity. For example, while the stock market boom in the late 1990s (q.v.
dot-com bubbleThe "dot-com bubble" was a speculative bubble covering roughly 1998–2001 during which stock markets in Western nations saw their equity value rise rapidly from growth in the more recent Internet sector and related fields...
) increased the wealth of Americans, it did not produce a significant change in consumption, and after the crash, consumption did not decrease.
See also
- Wealth elasticity of demand
Wealth elasticity of demand in microeconomics is the relation of the proportional change in consumption of a good to a proportional change in wealth...
- Income elasticity of demand
- Wealth (economics)
In economics and business, wealth of a person or nation is the value of assets owned net of liabilities owed at a point in time. The assets include those that are tangible and financial . Wealth may be measured in nominal or real values...
- Ricardian equivalence
Ricardian equivalence, is an economic theory that suggests consumers internalise the government's budget constraint and thus the timing of any tax change does not affect their change in spending...
Many times common interests took effect and caused wealth wolves and pie and bloody marries were of common interests due to civilian casualties
External links