The key with physical wealth is that once it has been acquired, it is no longer needed. That is, once a consumer like Duncan Thurly owns a house, he has a house, and he does not need a house. Alternatively, not owning a house puts Duncan in prime position to buy a house. Or should The Wacky Willy Company purchase a new factory, then it has a factory and does not need a factory. But, not having a factory puts The Wacky Willy Company in prime position to buy a factory.

Changes in physical wealth, as such, tend to cause consumption expenditures and investment expenditures to change in the opposite direction.

• If households and businesses have more physical wealth, then they do not need to buy what they have, and consumption expenditures and investment expenditures tend to fall.


• If households and businesses have less physical wealth, then they do need to buy some, and consumption expenditures and investment expenditures tend to rise.

What It Does

Physical Wealth

More Physical Wealth

The household sector reduces consumption expenditures by increasing saving. This saving could take the form of simply diverting more disposable income into bank savings accounts or other financial assets. However, it is also likely to take the form of making payments on the loans used to purchase these durable goods. Because loan repayments are income that is NOT used to buy current production it is considering saving. The result is that this increase in physical wealth causes a decrease in consumption expenditures and subsequently a decrease aggregate expenditures.

To see how an increase in physical wealth affects the aggregate expenditures line, click the [More Wealth] button. The accumulation of physical wealth triggers a decrease in aggregate expenditures, which is a downward shift of the aggregate expenditures line.

Less Physical Wealth

The household sector is able to pay for this extra consumption, even though disposable income might not be rising, by decreasing saving. This saving could take the form of simply withdrawing funds from existing bank savings accounts or "cashing in" other financial assets. However, it is also likely to take the form of getting loans through financial markets. The result is that this decrease in physical wealth causes an increase in consumption expenditures and subsequently an increase aggregate expenditures.

To see how a decrease in physical wealth affects the aggregate expenditures line, click the [Less Wealth] button. The drop in physical wealth triggers an increase in aggregate expenditures, which is a upward shift of the aggregate expenditures line.

What Does It Mean?

During an expansion, the household sector accumulates physical wealth, especially in the form of durable goods. However, once this physical wealth has been accumulated, the household sector reduces consumption expenditures, often because they are paying off the debt used to buy these durable goods. The drop in consumption induces a decrease in aggregate expenditures, which can then trigger the onset of a contraction.