Balance between consumption and investment

It is almost impossible for an economy to focus on both consumption and investment as there is a constraint to resources. Once a country wants to boost its consumption, the resources would be used for boosting consumption rather than investment. Though consumption or investment has its multiplier effects, the proportions of spending on consumption and investment are different and their impacts on the economy are also different.

The returns from consumptions and investment may not intervene with each other. Spending on consumption may not have effects on the investment, spending on investment may not have effects on the consumption. Usually people believe that increasing consumption can lead to more demand in the market, thus companies would boost their supply via increasing their investment. However, increasing in investment does not boost the market supply or the companies’ productive capacities immediately, as investment has lagged effects. Therefore, when more is spent on consumption, it may increase companies’ investment; however, investment decisions are made based on companies’ expectations about the future, if they are uncertain about if the future market still needs such demand, they may not invest in boosting their production. In addition, companies also make their investment decisions based on their expectations about their individual sectors’ future performance.

Especially when the government is trying to direct the economy, the sources spent on the consumption could hardly be spent on achieving the goals of boosting investment and boosting consumption at the same time.