What is the wealth effect, and how does it influence consumer behavior in the economy?
Answer (1)
The wealth effect is an economic concept that explains how people tend to spend more money when they feel wealthier, even if their income hasn’t actually changed. This feeling of being richer usually comes from seeing the value of their assets—like homes, land, or stocks—go up.Examples of Wealth EffectFor example, if a family in the Philippines owns a house in Metro Manila and the value of that property increases, they may feel more confident financially. Even if they’re not earning more money each month, they might decide to spend more—buy a new refrigerator, eat out more often, or send their child to a private school. That increased spending helps boost the economy because businesses earn more and may hire more workers.This happened in the United States before the 2008 financial crisis. As house prices went up, many Americans borrowed more money using their homes as collateral. They used this money for shopping, vacations, or buying new cars. But when the housing market crashed and home values fell, many people felt poorer. They stopped spending, and the economy slowed down dramatically.In Asia, similar effects are seen. In countries like China and South Korea, when property and stock markets do well, people spend more. But when those markets fall, spending drops, too.In the Philippines, real estate booms in cities like Cebu or Davao also make families feel wealthier. Developers build more malls and shops in these areas because they expect people to spend more. But if the property market weakens, businesses may lose money and jobs may be cut.
