Consumption Depends the Value of Stock and Interest after IMF

Although domestic consumption was dependent on income before the foreign currency crisis, after the period of supervision by IMF, the value of stock and interest rate have crucial influence on consumption.

According to Korean National Bank`s report on `Change and its effect of consumption`, before IMF era, the income had the most crucial influence on consumption while the price of stock and interest had very insignificant influence.

But after the system of IMF, if the interest goes down, the consumption, especially the consumption of the middle and upper class, went up. It is because that the fall of interest boosts the homes loan although it reduces the income from interest.

If the value of stock goes up, all classes increased their consumption and especially middle and upper class consumption went up with high margin. For example, the rapid increase of the stock price in 1999 and the decrease of the stock price in the end of 2000 brought accordingly up and down of consumption.

Korean National Bank analyzed that especially automobile and electronics were under the big influence.

The change of the price of real estate influenced mainly the consumption of upper class.

The ratio of consumption to GDP also decreased from 54.1percent (1997) to 50.4 percent (last year). It shows that consumption did not increased with GDP. Korean National Bank analyzed that the increase of consumption is important to economic growth since it creates more jobs than investment and export. If 100million won of consumption increase, it creates 32 jobs while same amount of investment and export creates 22 jobs and 19 jobs each.

Lee Heon-Jin mungchii@donga.com