Question

how does consumer confidence serve as a proxy for economic activity and outcomes and the circular flow diagram activity?

Answer 1

Consumer confidence in an economy serves as a proxy for economic activity and outcomes because consumer confidence is positively related to the level of economic activity in the nation. If economic activity in the nation is blooming and when Real GDP in the economy is increasing, then it can be seen that consumer confidence in the economy is high. On the other hand, when the economy is in recession or economic activity in the nation falls, then consumer confidence in the nation also decreases. Thus, consumer confidence can be taken as a proxy for economic activity in the nation. In the circular flow diagram, as consumer confidence is high, purchases are more, income generation in the economy increases and this increases the value of Real GDP in the economy. On the other hand, as consumer confidence declines, the economic activity in the nation also decreases.