Spending VS Earning

One of the earliest economic concepts I learnt is nothing other than this very idea that spending and earning are pretty much the same thing (i.e. spending = earning) when you look at the broad picture of the whole economy. To an individual, a spending is cash outflow, and an earning is cash inflow. So how can your spending be your earning? Well, that is not possible. But how about your spending = another's earning? Why not eh? Simply put, the $3.3 you spend on your daily Iced Latte at Brown (Brown is the best. True story.) will be credited to Brown's revenue. Let's just say your spending, no matter what you spend it on, is never a waste! Yes, there is always a recipient, and as long as that remains true, the whole economy will be healthy! (let's assume all else constant at this point).

So remember folks, spending may hurt you, but it helps the others because your expense is their income. And that is how GDP is measured. Just to remind you, when we look at the economy as a whole, expenditure is equal to income. So in measuring GDP of a country, to avoid double counting (adding both expenditure and income of the whole country together will severely distort the result by doubling the amount of the actual GDP), what they do is looking at either the income side or the expenditure side, NOT BOTH.

This is also what we call "Circular Flow", the very idea that gave rise to the world renown Keynesian economics. John Maynard Keynes, the father of the dubbed modern economics, was the one who was keen enough to notice that the decline in aggregate expenditure would severely hurt the economy because as expenditure plunges, income also falls (again, expenditure = income). During the great economic depression in the 1930s, Keynes urged the government to pump out spending (run deficit) so to keep the circular flow of wealth (spending -> income -> spending -> income...) going. This is called expansionary fiscal policy, in which the government will spend more or cut tax. As the government spent, the business world was able to rebound back on its feet, employment rose, and people were able to once again earn enough to spend to sustain their livelihood. So the little spending spark created by the government had made it possible to fix the stalled economic engine.

In a nutshell, spending is just as vital to the economy as earning. Even a broken window that forces you to call the glass repairman is not such a bad thing for the economy. I mean if everyone's windows are damage-proof, then we will lose a section of the job market (no window repairman since they have nothing to do!).

Of course, I am simplifying the concept as much as possible so that it is easy for you, the reader, to digest. Things aren't that simple. Theory is not perfect, and this one is no exception. There are loads of criticism deriding what I have just explained to you.

Next time, we will introduce an add-on to this topic. We will look at the forgotten side of the story by including new variables, make it a little bit more complicated for those seeking challenges.