Economics 101
August 20, 2009 10:10 AM Subscribe
What is the difference between spending and consuming? And what is the meaning of "luxury goods"?
I'm reading a very insightful book called In the Jaws of the Dragon by Eamonn Fingleton, basically about how Western leaders are idiots and that China is set to take over the world. The author talks about how significant East Asian savings will become, comparing it to the Age of Discovery. Then he goes onto say how East Asians are forced to save by their governments through clever policy which "suppresses consumption" but I'm having trouble comprehending the explanation. He writes:
"...there are several ways consumption can be suppressed. Sometimes the increased saving arises in the household sector, sometimes in the business sector. In the latter case often this occurs when artificially induced shortages of luxury goods generate huge profits for oligopolistic local suppliers. Provided such profits are reinvested, they count as part of the national savings rate. This helps explain the paradox that while the macroeconomic data indicate that East Asians under-consume, Western news media often run stories about big-spending East Asian shoppers who think nothing of paying exorbitant prices - far higher than in the West - for Louis Vuitton handbags or Rolex watches. The key point is that while it is easy in East Asia to spend (because prices of luxuries are so high), it is difficult to consume (because big spenders get so little for their money). The larger economic point is that suppressed consumption creates savings somewhere. Exactly where is secondary."
1) I don't think I understand the true meanings of "spending", "consuming", and "luxury goods", which leads to the questions:
2) Why is it easy to spend because prices of luxuries are so high? What is the relationship between "easy to spend" and "high prices of luxuries"?
3) When he says "it's difficult to consume because big spenders get so little for their money, does he mean that "consuming" means spending money on luxury goods?
Many thanks for you help!
I'm reading a very insightful book called In the Jaws of the Dragon by Eamonn Fingleton, basically about how Western leaders are idiots and that China is set to take over the world. The author talks about how significant East Asian savings will become, comparing it to the Age of Discovery. Then he goes onto say how East Asians are forced to save by their governments through clever policy which "suppresses consumption" but I'm having trouble comprehending the explanation. He writes:
"...there are several ways consumption can be suppressed. Sometimes the increased saving arises in the household sector, sometimes in the business sector. In the latter case often this occurs when artificially induced shortages of luxury goods generate huge profits for oligopolistic local suppliers. Provided such profits are reinvested, they count as part of the national savings rate. This helps explain the paradox that while the macroeconomic data indicate that East Asians under-consume, Western news media often run stories about big-spending East Asian shoppers who think nothing of paying exorbitant prices - far higher than in the West - for Louis Vuitton handbags or Rolex watches. The key point is that while it is easy in East Asia to spend (because prices of luxuries are so high), it is difficult to consume (because big spenders get so little for their money). The larger economic point is that suppressed consumption creates savings somewhere. Exactly where is secondary."
1) I don't think I understand the true meanings of "spending", "consuming", and "luxury goods", which leads to the questions:
2) Why is it easy to spend because prices of luxuries are so high? What is the relationship between "easy to spend" and "high prices of luxuries"?
3) When he says "it's difficult to consume because big spenders get so little for their money, does he mean that "consuming" means spending money on luxury goods?
Many thanks for you help!
Yes, according to his usage, it seems that "spend" corresponds to the prices of goods and services being purchased, while "consume" corresponds to the value of those same goods and services. Artificially high prices for luxury goods, then, would mean that East Asian purchasers of a given good must "spend" more in order to "consume" the same as purchasers elsewhere. His point seems to be that when "oligopolistic local suppliers" invest extra profits that they capture due to artificially high prices, the luxury spending of wealth East Asians is in effect converted from consumption to savings.
posted by onshi at 10:53 AM on August 20, 2009
posted by onshi at 10:53 AM on August 20, 2009
On a different note, I don't believe that saving at that rate is sustainable. For starter's take a look at Bernanke's speech. If you google "global savings glut" you'll see even more stuff on this. There are some neat ny times articles on this issue too. Here's one and here's another.
posted by caelumluna at 1:25 PM on August 20, 2009
posted by caelumluna at 1:25 PM on August 20, 2009
You spend money, you consume a resource.
(It is easy for Asians to consume because they have so much savings. Not because the prices are so high. The prices are high because you have a lot of money (savings) chasing too few goods. Or: because there are too few goods, there is too much money, which is why it is easy to spend.)
(Or. He is talking in terms of measurement- it is easy for it to appear that they spend a lot and don't consume as much, because prices are high.)
It seems like the trickle down theory wrapped in a different fish.
posted by gjc at 4:37 PM on August 20, 2009
(It is easy for Asians to consume because they have so much savings. Not because the prices are so high. The prices are high because you have a lot of money (savings) chasing too few goods. Or: because there are too few goods, there is too much money, which is why it is easy to spend.)
(Or. He is talking in terms of measurement- it is easy for it to appear that they spend a lot and don't consume as much, because prices are high.)
It seems like the trickle down theory wrapped in a different fish.
posted by gjc at 4:37 PM on August 20, 2009
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posted by restless_nomad at 10:14 AM on August 20, 2009