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The impact of changes in actual or perceived value of assets on consumption decisions. Changes in wealth that are perceived to be temporary will have a smaller effect on consumption expenditures than changes in wealth that are deemed permanent.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
wealth effectthe effect on current CONSUMPTION of changes in a person's WEALTH, in particular changes in the prices of owner-occupied houses. Rapid increases in property values may encourage property owners to spend more on current consumption, either out of current DISPOSABLE INCOME or on CREDIT;
conversely, falling property prices may serve to reduce property owners‘wealth and cause them to curtail their current consumption. See CONSUMPTION FUNCTION.
Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005