It may not always seem like it, but individuals have a significant impact on it economy. Many factors affect the economy, including consumer spending, global trade, business investment, and government policy. In terms of demand for consumer goods, prices, inflation, interest rates, employment levels, wages and consumer confidence play a major role. As these factors change, so does the economy.
Find: Trump wants to eliminate income taxes: Here’s what it means for the economy and your wallet
Read next: 6 Money Moves You Should Make If You Want to Look Like the Rich
GOBankingRates spoke with Dennis Shirshiko, professor of finance and economics, to find out how much impact individual decisions have on broader economic outcomes. City University of New YorkAs well as development leader at GoSummer.
Here’s how much of an impact you as a consumer have on the US economy.
Earning passive income doesn’t have to be difficult. Let’s start this week.
Influence of consumer behavior and demand
„Individuals absolutely have an impact on the economy, both directly and indirectly,” Shirshikov said. „At a direct level, every purchase decision, investment choice, and even employment action contributes to aggregate demand and supply that shape economic outcomes.”
Let’s break this down further, starting with purchasing decisions.
Purchase results
Consumers make decisions about what to buy — and what not to buy — almost every day. These decisions are made based on various factors including whether the current prices of goods and services are acceptable or not.
When a person chooses to buy something at its current price, it lets businesses know that the item has value. The opposite is also true. In both cases, businesses will compete with each other to provide these goods and services, which will continue to attract consumers while generating profits.
Of course, not everything changes in price on demand. Demand does not always decrease because of current prices. Prescription drugs etc. are in high demand even though the prices are high. These types of materials are considered „inelastic”.
It is also worth noting that consumer demand affects not only pricing but also inflation. Inflation is the daily increase in the prices of goods and services, often measured by the Consumer Price Index (CPI). The current annual inflation rate in the US for the 12 months ending July 2024 is 2.9%.
The higher the demand for services and goods, the higher the prices – thus higher inflation rates. But again, when demand falls, prices often do too—except for inelastic products. It may also affect the inflation rate.
Next is investment choice, which is tied to consumer confidence.
Learn more: How much money is required to be considered middle class in each state?
Investment decisions
If individuals believe in the US economy, they are more likely to invest in financial products such as stocks and bonds. This can generate more capital for businesses, allowing them to continue growing and growing. On the other hand, lower consumer confidence – and therefore lower investments – will result in an overall economic downturn.
Consumer behavior — that is, how they choose to spend or spend their money — can also influence industry trends. For example, if more people spend their money on eco-friendly or sustainable brands and products, it will encourage growth in these areas. At the same time, this can have a negative effect on the demand for more traditional products or for these brands and companies.
Then there is employment and wages/income. These can have both direct and indirect effects on the economy.
When unemployment rates are low and wages are relatively high, more people are willing to spend money. This is especially true when they expect to receive a steady income in the future.
But when unemployment rates are high or there are concerns about a recession or other downturn in the economy, spending slows — and economic growth slows. It could also affect businesses, which could have a ripple effect on industry jobs — especially if those businesses create more jobs or cut existing roles to manage costs.
As specified in a US Bureau of Labor Statistics An article on the 2007-2009 recession states, „American consumers are considered the 'engine’ of economic growth in the United States…when consumers shop, they directly support jobs in companies that produce, transport, and sell final goods and services.”
The article states, “Consumers also implicitly support jobs that make inputs (intermediates) necessary for final production. More American jobs are directly or indirectly related to consumer spending than any other sector of the economy.”
Impact on economic policies
„Consumer spending is often the most immediate and visible driver of economic activity, as it directly affects the demand for goods and services,” Shirshikov said. „Indirectly, individuals influence the economy through their collective behavior, which can drive market trends, affect interest rates, and even change government policies.”
The US government often introduces new policies to encourage or discourage consumer behavior, depending on its goals. Take the Clean Vehicle Tax Credit for EVs as an example. Those who qualify can get up to $7,500 in tax credits for their electric vehicle. This encourages more people to buy energy efficient vehicles.
„Government policy, especially in the areas of taxation and regulation, can stimulate or stifle economic growth,” Shirshikov said.
The bottom line
Ultimately, certain factors affect the U.S. economy, including consumer behavior, demand, investment decisions, consumer confidence, wages, and employment. In times of high consumer confidence, the overall health of the economy – both indirectly and directly – can benefit. When demand falls, prices sometimes fall, but so does economic growth.
More from GOBankingRates
This article appeared first GOBankingRates.com: I’m an Economist: This is how much impact you have on the economy