What is Demand?
Demand drives everything in the economy. All businesses try to understand or guide consumer demand, so they can be the first or the cheapest in delivering the right products and services. If something is in high demand, businesses make more. If they can’t make more fast enough, the price goes up.Demand can be measured by a country’s
- total production of goods and service
- minus its exports, which are demanded by other countries,
- plus its imports, which are the items it doesn’t make at home.
America Has Been the World’s Best Customer
Right now countries need America because we are the largest importer, at $1.7 trillion, twice as large as Germany, the next largest importer, and three times as large as China, the world’s third largest importer. Because of this role, all countries have an interest in maintaining good relations with the U.S., and in keeping our economy healthy.Why the U.S. Imports so Much
The key component of demand is consumer goods and services. Whereas the U.S. supplies all of its own services, it imports goods that can be made more efficiently overseas, such as industrial supplies, oil, telecommunication equipment, autos, clothing and furniture. It is often said that the U.S. has lost its competitive edge in producing these products, and has become a service-oriented economy. The key driver of demand growth is economic growth. Here’s how it works. As incomes rise, people are able to buy more. As people buy more, companies can make more, and then pay employees more. The ideal situation is healthy growth without inflation, which has been the situation in the U.S. for the last five years.U.S. Demand Could Decline
Since demand is dependent on personal income and wealth, a decline in wealth will lower demand. In fact, The Federal Reserve reported that the median net worth per family rose only 1.5% from 2001 to 2004. Since net worth did not keep up with inflation during these years, the average household feels poorer. Although demand grew, it was financed by home equity loans. As a result, overall debt and debt servicing took a larger percent of family income. In fact, the number of late payments (60+ days) increased, especially among the bottom 80% of the income distribution.As the housing market declines, this reliance on debt could result in a decline in U.S. demand.
Foreign Demand Could Increase
The Organization for Economic Cooperation and Development (OECD) predicted that China, India and Russia will grow strongly over the next six months, while the U.S., Japan, and Brazil will slow. The U.K. and the Euro area had mixed indicators, which portend moderate growth.Despite the OECD’s forecast, the Bank of Japan is predicting an upswing in economic growth throughout 2007. One of the drivers of this growth is expanding private consumption as a result of wage increases. In addition, the housing market is getting stronger.
Many experts believe that Europe’s economic recovery is speeding up while America's is slowing down. They explain that Europe has built its strength on encouraging exports and domestic consumption, while that of the U.S. is built on debt financing.
