Wealth Effect

wealth effect

The relationship between personal wealth and consumer spending. According to the wealth effect consumers have a tendency to spend a larger proportion of personal income as their wealth increases. The wealth effect was used to explain increases in consumer spending in the late 1990s when stock prices boomed.

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Wealth Effect

The idea that an economic actor's consumption increases as the result of a real or perceived increase in wealth. For example, one may spend more after a promotion and pay raise. However, the concept most often refers to an increase in consumption after the value of one's stocks or other non-cash assets grows significantly. In other words, the concept states that one increases one's consumption when he/she feels richer, whether or not he/she actually is. Wealth effect came into vogue in the late 1960s and early 1970s. Critics contend it did not adequately explain the lack of change in consumption before, during, and after the dotcom bubble of the 1990s.