Demonstration Effect

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Demonstration Effect

The under-development of the economically backward countries is also due to what has been called. the ‘demonstration effect.The demonstration effect increases propensity  which reduces the rate of savings and investment. A very important principle has been propounded regarding consumption, viz.; that an individual’s consumption docs not merely depend on individual’s own income bur it is very much influenced by the standard of living or consumption of his friends and relations. When a man sees that some of his friends and relatives have refrigerate, scooter, radio or TV set, good furniture, good clothes, etc .• he likes to imitate them and is desirous of ‘possessing and using these things. As soon as he .can afford or when his income increases he buys such things. This means that instead of increasing his savings, when his i~come increases, he increasing consumption.

Thus, consumption does not depend upon absolute real income but on relative level of real income. That is, consumption expenditure does not depend on our own purchasing power but on what is being spent by other on the purchase of luxury articles. An eminent American economist Boysenberry has called it ‘Demonstration Effect.’ The demonstration effect has adversely affected people’s capacity to save. It has been estimated that 75 per cent Americans are unable to make any saving. It docs not mean that they arc too poor to save. But they cannot save because they Thus, consumption does not depend upon absolute real income but on relative level of real income. That is, consumption expenditure does not depend on our own purchasing power but on what is being spent by other on the purchase of luxury articles. An eminent American economist Boysenberry has called it ‘Demonstration Effect.’ The demonstration effect has adversely affected people’s capacity to save. It has been estimated that 75 per cent Americans are unable to make any saving. It docs not mean that they arc too poor to save. But they cannot save because they also export to them their higher standard of living. Their superior standard of living increases their propensity to consume. because they try to imitate their standard of living. Nurkse calls it Instructional Demonstration Effect.’ He says .When people come into contact with superior goods or superior patterns of consumption, with new articles or new ways of meeting old wants. they are apt to feel.after a whee  certain restlessness s and dissatisfaction. Their knowledge is extended, their imagination is stimulated new desires are aroused the propensity to consume is shifted upward.

Propensity to consume directly affects propensity to save: Higher the consumption less is the saving. When poor countries imitate the higher standards of living of the rich countries, they have to pay the price for it. The price is that their capacity to save is reduced. As Nurkse observes: “The great and growing gaps between the income levels and. therefore. Irving standards of different countries, combined with increasing awareness of these gaps, may tend to push up the general propensity to consume of the poor nations. reduce their propensity to save.The decrease in their propensity to save is bound to prove a big obstacle in the path of their economic development.

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Demonstration Effect