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What Makes an Economy Grow and Why Your Spending Matters

Even if you are living under a rock, you probably already known that a growing economy is always good news. It brings hike to your wages, exposes you better products and even better market competition and brings about positive changes in your life. Nonetheless, if you have invested your money, you will be getting good returns as well

What makes an economy grow?

One of the most important but underrated factors for economic development and growth is your country’s government. A federal and state government setup that allows businesses to be set up easily, doesn’t tax the people too highly and encourages production and entrepreneurship along with innovation is necessary for economic growth. No matter how much innovativeness citizens boast about, bad or discouraging government policy is enough to make it useless.

The second most important factor in a country’s development is production and entrepreneurship. On a micro level, one person becoming an entrepreneur doesn’t make a difference. However, on a macro level, thousands of such entrepreneurs work together to create bustling economic growth numbers. Some of them even go ahead to create very successful large-scale enterprises and employ hundreds, if not thousands, of people. This helps in economic progress of the country as well.

Where does your spending enter the picture?

If economic growth is all about the government initiatives and entrepreneurs, why do your spending habits and saving profiles matter? It is because your spending drives the economy. If you don’t demand for products, they will never be created by any entrepreneur’s. If no entrepreneurs/companies or businesses make products, then the GDP of a country will go down.

The government will be forced to inject money into the economy artificially to encourage spending and production. This, however, comes at a price. First, it doesn’t last long. Second, it creates a depression-like situation in the economy. If it continues for too long, rest assured that your economy will come to a virtual standstill.

In countries like Japan, government and banks are worried because people are spending less and less. Though the Japanese economy is more mature than any other part of the world, it still needs to increase consumption at home. To sustain, the Japanese producers have to depend on exports. If consumption at home increases, there will be more economic growth in the country.

That makes savings seem worthless, doesn’t it? Well, it doesn’t. If you are not saving your money entirely in cash under your mattress, it is likely that you are keeping it in banks. Now, the banks lend money to aspiring entre openers to help them increase production in the economy. If you are directly investing your money by buying stocks, mutual funds etc., you are helping a business or an entire industry grow by supplying them your money in lieu of good returns.

This was one of the simplest ways in which I could have explained economic growth to you. Of course, it is a very complex subject and doesn’t depend a couple of factors. However, these three are the basics. Let me know if you have any questions.