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Question #1: What did you learn about your topic that surprised you the most?

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Question #1: What did you learn about your topic that surprised you the most?

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I was the most surprised to make the connection between consumer credit, the growth in the economy due to this, and the creation of more jobs and employment opportunities this enables.

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Question #2: Provide a real-life example of how this topic is relevant or interesting for you.

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Question #2: Provide a real-life example of how this topic is relevant or interesting for you.

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This topic is interesting to me because I am already contributing to the economy by using a credit card occasionally. Realizing how my consumer credit impacts the economy as a whole is extremely interesting information!

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Question #3: If you could pass on your knowledge to a family member or friend, what do you think is the most important thing to pass on?

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Question #3: If you could pass on your knowledge to a family member or friend, what do you think is the most important thing to pass on?

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If I was to pass on any piece of this information to a family member or friend, I would inform them that consumer credit is an essential element in a growing economy and it enables the creation of more employment! However, it is crucial for one to track how much they are spending and making to avoid serious financial consequences.

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This graphic shows some of the commonly made purchases people make using a form of credit. This image brings awareness to the fact that at some point in everyone's life there is a high probability that credit will be used.

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Image #2: Gif that Reflects The Normalized Message of Consumer Spending

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Image #2: Gif that Reflects The Normalized Message of Consumer Spending

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It is normalized in Western society for people to always want more, or want the newest item. This is one of the contributing factors of consumer spending and can partially explain why people spend money on credit, despite not having the money to re-pay it efficiently.

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This video provides a concise overview of what the term "Economy" means and the basic functions of it.

I chose this video because an understanding of what an economy is and the basic principles of how one can function is important in understanding the topic of how consumer credit impacts the economy.

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What Is an Economy?

An economy is a complex system of interrelated production, consumption, and exchange activities that ultimately determines how resources are allocated among all the participants. The production, consumption, and distribution of goods and services combine to fulfill the needs of those living and operating within the economy.

An economy may represent a nation, a region, a single industry, or even a family.

Understanding Economies

An economy encompasses all of the activities related to the production, consumption, and trade of goods and services in an entity, whether the entity is a nation or a small town.

No two economies are identical. Each is formed according to its own resources, culture, laws, history, and geography. Each evolves according to the choices and actions of the participants.

These decisions are made through some combination of market transactions and collective or hierarchical decision-making.

Types of Economies

In the modern world, few nations are purely market-based or purely command-based. But most lean toward one or the other of these models.

Market-Based Economies

Market-based or "free market" economies allow people and businesses to freely exchange goods and services according to supply and demand.

The United States is mostly a market economy. Producers determine what's sold and produced, and what prices to charge. If they expect to succeed, they will produce what consumers want and charge what consumers are willing to pay.

Through these decisions, the laws of supply and demand determine prices and total production. If consumer demand for a specific product increases, production tends to increase to satisfy the demand. The increased demand causes prices to rise until consumers balk and cut back on their purchases. Demand for the product will then decline and prices will decline with it.

This constant tug of supply and demand allows a market economy a tendency to naturally balance itself. As the prices in one sector rise with demand, the money and labor needed to fill that demand shift to those places where they're needed.

Command-Based Economies

Command-based economies depend on a central government that controls the production levels, pricing, and distribution of goods.

In such a system, the government owns industries deemed essential on behalf of the consumers who use them. Competition among companies is discouraged or banned. Prices are controlled.

Communism requires a command-based economy. Contemporary examples include Cuba and North Korea.

A command-based economy attempts to supersede the workings of supply and demand.

Mixed Economies

Pure market economies rarely exist in the modern world since there's usually some degree of government intervention or central planning. Even the United States could be considered a mixed economy. It may not mandate production but it has ways to influence it. For example:

In late 2021, President Joe Biden ordered 50 million gallons of oil released from the nation's Strategic Petroleum Reserves with the stated aim of forcing gasoline prices lower by increasing its supply.

In 2022 and 2023, the Federal Reserve imposed a series of interest rate increases on the nation's banks. The purpose was to raise interest rates throughout the economy in order to reduce demand for loans and therefore reduce inflation in the costs of goods and services.

In truth, most of the world's developed economies mix market-based and command-based models.

China had a command economy only until 1978, when it began a series of reforms that encouraged private enterprise.

Studying Economies

The study of economies and the factors affecting economies is called economics. The discipline of economics can be broken into two major areas of focus: microeconomics and macroeconomics.

Microeconomics

Microeconomics studies the behavior of individual people and businesses in order to understand why they make the economic decisions they do and how these decisions affect the larger economic system.

Microeconomics studies how a particular value is attached to a product or service. It examines how individuals coordinate and cooperate with each other in business.

Microeconomics tends to focus on economic tendencies, such as how individual choices and actions impact changes in production.

Clearly, principles of psychology and marketing influence microeconomics.

Macroeconomics

As the name implies, macroeconomics studies the big picture.

Macroeconomics includes the study of economy-wide factors such as the effect of rising prices or inflation on the economy. It seeks to track and understand the financial indicators that clarify an economy's success or failure over time, such as gross domestic product (GDP), changes in unemployment, and consumer spending.

In short, macroeconomics studies how the economy as a whole behaves.

Economic Indicators

As noted above, macroeconomics is the study of the big picture and that picture is incomplete without a set of economic indicators. These are some of the most closely-watched of those indicators.

Gross Domestic Product (GDP)

Gross domestic product (GDP) is the total value of all of the completed goods and services produced by an economy during a period of one year.

The gross domestic product of the United States reached $26.5 trillion in 2023.

Unemployment

The Unemployment Report estimates the number of people who are working for pay during a given period. More importantly, the number is tracked over time in order to determine whether unemployment is worsening.

In the U.S., the Bureau of Labor Statistics (BLS) publishes a monthly unemployment report that breaks down how many people are working, the average number of hours they are working, and their average earnings. This is used to produce the unemployment rate.

Inflation (or Deflation)

Inflation in consumer prices is measured and tracked so that problems in the economy can be pinpointed. If the rate of inflation is outpacing the rate of income growth, the economy is in trouble. Inflation can be negative, too; this is called deflation, but it is relatively rare.

The BLS also publishes a key inflation report for the U.S. The Consumer Price Index tracks the costs of goods and services from month to month. It breaks down its report into the vital areas of consumer spending, such as food, energy, and rent costs.

Those numbers determine the rate of inflation.

Balance of Trade

An economy's balance of trade is a comparison of the amount of money that is spent on imports of goods and services and the amount of money it earns on goods and services it exports. It is measured primarily by recording all of the products that pass through the customs office of a country.

A nation achieves a positive balance of trade when it exports more than it imports. It has a negative balance of trade when it buys more than it sells.

Neither is necessarily good or bad. A nation may have a negative balance of trade because foreign businesses are heavily investing in its future. A nation with a positive balance of trade may have protectionist policies in place that could hurt it in the long run.

The U.S. had a balance of trade deficit in 2022 of about $945.3 billion, up from $845 billion the previous year, according to the U.S. Bureau of Economic Analysis.

History of the Concept of Economy

The word economy derives from the Greek term for household management ("oikonomia") and the word is still used in that context.

Economics as an area of study was touched on by philosophers in ancient Greece, notably Aristotle, but the modern study of economics began in 18th-century Europe, particularly in Scotland and France.

Development of Modern Economics

The Scottish philosopher and economist Adam Smith, who in 1776 wrote a landmark book called "The Wealth of Nations," was thought of in his own time as a moral philosopher. He and his contemporaries traced the evolution of economies from prehistoric bartering systems to money-driven and eventually credit-driven economies.

During the 19th century, the development of technology and the growth of international trade created stronger ties among countries, a process that accelerated into the Great Depression and World War II. After 50 years of the Cold War, the late 20th and early 21st centuries have seen a renewed globalization of economies.

What Is Economics?

What Is Macroeconomics vs. Microeconomics?

What Is Economics in Real Life?

The Bottom Line

An economy is a community that is observed by an analysis of its allocation of resources. Every individual and family in the community has a contribution to make. In return, each expects a share of the goods and services provided by other members of the community.

In modern times, the functioning of an economy is analyzed and quantified by economists.

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Economy: What It Is, Types of Economies, Economic Indicators

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An economy is a system of production and consumption activities that determines how resources are allocated among all of its participants. Learn how it works.

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This video provides a detailed overview all things credit related. The concept of credit, the different types of credit, and both the advantages and disadvantages of credit are all explained in this video.

This is an excellent source of information to ensure ones understanding on credit. Without understanding consumer credit, one is unable to comprehend how it impacts the economy. Therefore, this video is essential in beginning to understand that credit has a greater impact than on the individual using it.

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Chapter 6 (Consumer Credit), Section 1 (What is Consumer Credit?)

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This wall will provide information regarding the importance of consumer credit on the economy. Consumer credit, also referred to as consumer debt, refers to the credit given to consumers without having to pay with their money at the time of a purchase. Consumer credit has a huge impact on an economy; explore this page to learn how!

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This video provides an overview of what consumer credit is and a brief overview of it's evolution to the current era. The end of the video eludes to the potential of a economic crisis if the trend of everyone relying on credit/debt to make purchases continues.

I choose this video as it provides essential information to understanding credit from a macro-economic prospective. It allows insight into how consumer credit does not merely impact the individual spending it, but rather the entire economy.

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This photo represents the potential of an economic crisis and touches on how consumers and credit can contribute to this.

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Website #1: Consumer Spending and Its Impact on Economy

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Website #1: Consumer Spending and Its Impact on Economy

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This article discusses the five factors that determine spending, and these include: disposable income, income per capita, income inequality, household debt, and consumer expectations.

I choose this article because it provides information regarding what contributes to consumer spending. By understanding these factors, one can understand how the economy operates, what direction the economy might be headed.

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Consumer spending is what households buy to fulfill everyday needs. This private consumption includes both goods and services. Every one of us is a consumer. The things we buy every day create the demand that keeps companies profitable and hiring new workers.

Almost two-thirds of consumer spending is on services, like real estate and health care. Other services include financial services, such as banking, investments, and insurance. Cable and internet services also count, and even services from non-profits.

The remaining one-third of our personal consumption expenditure is on goods. These include so-called durable goods, such as washing machines, automobiles, and furniture. More frequently, we buy non-durable goods, such as gasoline, groceries, and clothing.

Five Determinants of Consumer Spending

There are five determinants of consumer spending. These are the things that affect how much you spend. Changes in any of these components will affect consumer spending.

The most important determinant is disposable income. That's the average income minus taxes. Without it, no one would have the funds to buy the things they need. That makes disposable income one of the most important determinants of demand. As income increases so does demand. If manufacturers ramp up to meet demand, they create jobs. Workers' wages rise, creating more spending. It's a virtuous cycle leading to ongoing economic expansion. If demand increases but manufacturers don't increase supply, then they will raise prices. That creates inflation.

The second component is income per capita. It tells you how much each person has to spend. Income measurements might rise just because the population increases. Income per person reveals whether each person's standard of living is also improving.

Income inequality is the third determinant of spending. Some people's income may rise at a faster pace than others. The economy benefits when most of the gain goes toward low-income families. They must spend a more significant share of each dollar on necessities until they reach a living wage. The economy doesn't benefit as much when increases go toward high-income earners. They are more likely to save or invest additions to income instead of spending.

The fourth factor is the level of household debt. That includes credit card debt, auto loans, and school loans. Current consumer debt statistics show that household debt has reached new record levels. Surprisingly, high health care costs are one of the biggest causes of overwhelming debt.

The fifth determinant is consumer expectations. If people are confident, they are more likely to spend now. The Consumer Confidence Index measures how confident people are about the future. It includes their expectations of inflation. If consumers expect inflation to be high, they will buy more now to avoid future price increases. That's why the Federal Reserve targets a 2% inflation rate.

How It Affects You

Consumer spending is the single most important driving force of the U.S. economy. Keynesian economic theory says that the government should stimulate spending to end a recession. On the other hand, supply-side economists believe the government should cut business taxes to create jobs. But companies won't boost production without demand no matter how low taxes are.

If you doubt this, think about what would happen if everyone stopped spending. Businesses would eventually go bankrupt and lay off workers. The government would then have no one to tax.

The economy would have to rely on exports, assuming other countries kept up their consumer spending. Borrowing would keep the government and factories open. These additional components of the gross domestic product aren't as critical as consumer spending.

Even a small downturn in consumer spending damages the economy. As it drops off, economic growth slows. Prices drop, creating deflation. If slow consumer spending continues, the economy contracts.

But too much of a good thing can also be damaging. When consumer demand exceeds manufacturers' ability to provide the goods and services, prices increase. If this goes on, it creates inflation. If consumers expect ever-increasing prices, they will spend more now. That further increases demand, forcing businesses to raise prices. It becomes a self-fulfilling prophecy that 's hard to stop. That's why the primary mandate of the nation's central bank, the Federal Reserve, is to ward off inflation.

How Consumer Spending Is Measured

Consumer spending is measured in many different ways. The most comprehensive is the monthly Personal Consumption Expenditures (PCE) report.

The Consumer Expenditure Survey is released in August each year by the Bureau of Labor Statistics. It is similar to the PCE but has a little more detail about types of households. That's because the BLS analyzes data from the U.S. Census. The BLS releases the most current report in September each year.

Retail sales is another component of consumer spending. You can check how healthy it is with the most recent retail sales statistics.

The Bottom Line

Consumer spending drives a significantly large part of U.S. GDP. This makes it one of the biggest determinants of economic health. Data on what consumers buy, don't buy, or wish to spend their money on can tell you a lot where the economy may be heading. Watching the trend on consumer spending can serve as an invaluable tool for managing your investments.

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What You Buy Every Day Drives U.S. Economic Growth

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Consumer spending is what households buy to fulfill everyday needs. This private consumption includes both goods and services. Every one of us is a consumer. The things we buy every day create the demand that keeps companies profitable and hiring new workers. Almost two-thirds of consumer spending is on services, like real estate and health care.

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Website #2: How the Canadian Economy Benefits from Consumer Debt

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Website #2: How the Canadian Economy Benefits from Consumer Debt

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This article discusses how consumer spending is essential for economic growth for all economies. The article continues to explain how this is true in Canada though explaining common types of consumer debts, trends of consumer debt over decades, an explanation on why consumer spending matters in the economy, and a conclusion that summarizes why consumer spending is vital in a growing economy.

I chose this article because it provides an excellent overview of consumer credit/debt and its relationship to the Canadian economy. Most articles I have found on this topic pertains to the Unite States, thus, this article was of value to fellow residents of the country referred to as Canada.

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Consumer spending is vital to the economic growth of nations worldwide, Canada included, as long as we don't find ourselves in over our head. While corporations are often chastised for holding a record amount of cash on their balance sheets, it's actually consumer spending that accounts for the lion's share of economic growth. Let's take a closer look at Canada's latest consumer debt numbers from RBC Economics and what they mean to the future of our economy.

Mortgage and Non-Mortgage Debt

There are two main types of consumer debt: mortgage and non-mortgage debt. If you're like most Canadians and you aspire to one day own a home, you'll most likely need a mortgage. Residential mortgage debt includes mortgages with the big banks, as well as non-bank lenders and securitized mortgages. Non-mortgage debt includes all other types of consumer debt, including installment and revolving credit. Common examples of non-mortgage debt are credit cards, lines of credit, and personal loans.

Consumer Debt: By the Numbers

Household credit grew in April by 4.0 per cent year-over-year, following increases of 4.1 per cent in March and 4 per cent in February, according to RBC Economics (Source: RBC Economics - Canadian Credit PDF).

With home prices heading for the stratosphere, residential mortgage growth continues to outpace household credit, as homeowners take on larger mortgages. Residential mortgage growth edged down slightly to 4.9 per cent year-over-year in April, after four straight months of 5 per cent growth.

"Residential mortgage growth has stabilized in recent months and upside risks of renewed momentum are likely to be contained as housing activity is forecast to gradually moderate after a prolonged period of robust price and sales gains," RBC said.

The outstanding balances on non-mortgage debt, including credit cards, lines of credit, and personal loans grew by a modest 1.9 per cent in April year-over-year, following increases of 2 per cent in March and 1.9 per cent in February. When we drill down the numbers even further, we discover that while personal loans are up a whopping 11.8 per cent in April year-over-year, lines of credit and credit card debt are actually down 0.5 per cent and 1.4 per cent, respectively.

"In contrast, the emergence from cycle-lows for consumer credit indicates households have increased their appetite for non-mortgage loans," RBC said. "With offsetting effects, overall low rates of household credit growth will likely be sustained."

Why Consumer Spending Matters

GDP - short for Gross Domestic Product - is a measure of the market value of all final goods and services produced in a country. In developed countries like Canada, the United States, and the United Kingdom, GDP growth is primarily driven by consumer spending. In Canada household final consumption expenditure accounted for 57 per cent of our GDP, according to the World Bank.

A country's GDP figure is often used as a barometer for the overall health of its economy. When consumer spending grows steadily upward, it's usually indicative of a healthy economy. It's important for consumers to keep spending; any slowdown in consumer expenditures will be felt throughout the economy and can lead to higher unemployment rates. With sub-three-per-cent GDP growth forecast for the foreseeable future, it will be challenging for the Canadian economy to grow, especially if households stop spending and taking on debt.

Although consumer spending is important, there can be too much of a good thing. If consumers find themselves saddled with too much debt, it can lead to a slowdown in consumer spending and an uptick in bankruptcies and overall delinquency rates. The Bank of Canada has kept the overnight lending rate frozen at 1 per cent for nearly four years to help encourage consumer spending. If consumer spending slows to a crawl, it can lead to job loss and eventually a recession.

The Bottom Line

Consumer spending is an integral part of a growing economy. If consumers stop spending, it can lead to all sorts of unpleasant consequences, including unemployment and a recession. Through monetary policy, governments can encourage consumers to continue to spend by lowering interest rates and tax rates. Just remember to spend responsibly; only spend money you'll be able to repay when your bill comes due.

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How the Canadian Economy Benefits from Consumer Debt, CreditCardsCanada.ca

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Consumer spending is vital to the economic growth of nations worldwide, Canada included, as long as we don't find ourselves in over our head. While corporations are often chastised for holding a record amount of cash on their balance sheets, it's actually consumer spending that accounts for the lion's share of economic growth.

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Website #3: Current Canadian Consumer Credit Statistics

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Website #3: Current Canadian Consumer Credit Statistics

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This web-page provides data on Canadian consumer credit/debt statistics. It displays consumer credit from 2020-2021 and the drastic different due to COVID lockdowns.

I chose this we-page due to its visual representation of how credit is greatly impacted by the economy, and how the economy is doing also impacts ones individual credit.

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Trading Economics members can view, download and compare data from nearly 200 countries, including more than 20 million economic indicators, exchange rates, government bond yields, stock indexes and commodity prices.

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Canada Consumer Credit | 1971-2018 | Data | Chart | Calendar | Forecast

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Consumer Credit in Canada decreased to 601453 CAD Million in February from 602341 CAD Million in January of 2018. Consumer Credit in Canada averaged 198103.80 CAD Million from 1971 until 2018, reaching an all time high of 605466 CAD Million in December of 2017 and a record low of 11066 CAD Million in February of 1971.