Tuesday, February 20, 2007
CNY Econs!
This is bound to piss alot of people off.
So i was thinking the other day about the effect Chinese New Year, specifically the angpao giving has on the economy! With use of the multiplier effect, let's take a look!
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During CNY, parents give youths and children lots of angpaos with money, therefore increasing their wealth. As wealth is a component of the Consumption function, C Increases! (because we all love to spend more when we have more money)
As Aggregate Expenditure (AE) is made out of C+I+G+(X-M), an increase in consumption will therefore lead to an increase in AE!
(Insert Keynesian graph here)
This increase in AE leads to an excess in Demand, which prompts firms to employ more factors of production, such as labour! Therefore National Income increases, and Unemployment rate drops. Cool shit!
HOWEVER, the money doesn't come from nowhere. Our parents' real wealth actually decreases over the Chinese New Year, which willl lead to a reverse in the above process. But the effect isn't actually balanced out.
Because our Marginal Propensity to Consume (MPC) is more than that of our parents, (this arises from the fact that we have more needs than them since they're richer, MPCpoor > MPCrich remember?) the overall effect on National Income is actually an increase. In numerical terms, if our parents gave us a $100 for angpao, we'd probably spend about $80 of it (MPC = 0.8), but if they kept it for themselves, they'd probably only spend maybe $60! (MPC=0.6) Therefore there will be an overall increase in National Income!
Edit : Xinrui brought up the point that the angpao money that adults give may not actually be from their additional Income. They could actually be taking the money that they give out from their own savings, rather than using their additional Income to give out. So... They wouldn't really reduce Consumption. Either way, the same effect is achieved.
Hence i conclude that to help the economy, parents should give their children more angpao money.
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Damn i'm good.
posted by Moca at 11:19 AM
