How do expectations about the future influence both consumption and investment?
Answer (2)
ConsumptionIf people expect their future income to increase, they are more likely to spend more today because they feel confident about their financial future. Conversely, if they expect a downturn or lower income ahead, they tend to save more and reduce current consumption to prepare for tougher times.InvestmentBusinesses and investors base their investment decisions on expected future profitability. If they anticipate strong future demand and higher returns, they will invest more in capital goods, new projects, or technology today. If the outlook is uncertain or negative, they will delay or reduce investment to avoid risk.In short, positive future expectations boost current consumption and investment, while negative expectations cause people and firms to be more cautious, reducing spending and investment now.
Expectations about the future play a powerful role in shaping the behavior of both consumers and businesses. When people feel confident about the future—believing that the economy will improve, jobs will be stable, and prices will be manageable—they are more likely to spend money and invest. But when there is fear or uncertainty, people tend to save more and postpone spending or investment.In terms of consumption, let’s say a family in Pampanga hears news that fuel prices are going down, job opportunities are growing, and inflation is under control. They might decide to spend more: buy a new refrigerator, enroll their child in a private school, or take a vacation. These are big-ticket decisions based on positive expectations.But if the family hears that a recession is coming or that job cuts will happen, they might cancel plans to buy a motorcycle or hold off on home renovations. They will focus only on basic needs. This behavior reduces personal consumption and slows economic growth.For investment, the same pattern holds. A bakery owner in Baguio may plan to open a second branch if she expects strong demand and stable prices. But if news comes out about rising interest rates, political instability, or a coming typhoon season, she may delay the expansion. Businesses don’t want to risk investing when they are unsure about future profits.This concept is also seen during election years in the Philippines. Many investors delay major decisions until they know which political leaders will be in charge. If the new government is seen as pro-business, confidence improves. If not, businesses may pull back.Expectations are shaped by news, government policies, international events, and even public sentiment. They are not always based on hard data—but they influence real economic decisions that affect GDP, employment, and production.
