Is advertising a tool for economic growth?

Index

1. Extract
2. Tool of microeconomics
3. Advertising modifies the qualitative structure of the market
4. The market grows only if there is an augment in the income of the factors of production
5. Effect on the nominal and real income
6. Potential demand and effective demand
7. Only the macroeconomics policies modify the market
8. Advertising, economic growth, balance or recession
9. Conclusions 

1. Extract

Many people think that advertising increases market size. That idea is logical because advertising augment the sales of products advertised, however, it really does not expand the size of market. Therefore, advertising is not a tool to reach economic growth, in terms of net accumulation of capital; in the following paragraphs is explained why.

2. Tool of microeconomics

One of the main goals of microeconomics is the study of consumers and businesses conduct to improve its behavior. The basic function of advertising is to present the choices of goods and services of the market; advertising, then, is a tool used by microeconomics to obtain one of their fundamental objectives.

3. Advertising modifies the qualitative structure of the market

Though advertising exerts a global effect on consumers it does not change the quantitative structure of market; hence we say that advertising is not an instrument for the economic growth in terms of net accumulation of capital.

Advertising modifies the qualitative structure of market because it forces competitors to improve their products. Competition embraces price, quality and quantity. Generally advertising is developed in a positive sense highlighting the advantages of products. Although there may be an implied comparison between products, advertising prevents a direct or negative mention of competitors. All these facts contribute to modify the qualitative structure of the market.

Consumers would not know the advantages or disadvantages of the products if there were no advertising.

4. The market grows only if there is an augment in the income of the factors of production

Without an increase in the remuneration of the factors of production it is not possible the market growth and vice versa: the market reduces its size only if occur a reduction in the income of the factors of production; this happen because of: a) the reduction of the public and private investment, b) the decline of the consumer spending and c) the augment of inflation.

Advertising changes the habits of consumption and the demand of goods and services. The market is comparable to a cake. The cake is divided in many parts. Ones part are big and other small. Advertising only modifies the size of the parts but the cake, as a whole, does not change by effect of advertising. For example, if a company advertises its products is very likely to increase their sales, but not due to market growth but because it has taken away customers from competitors, so that gain of an advertiser is usually due to the loss of its competitors.

Advertising can be compared with a zero sum game where some win and other lose.

May be that the market grows, in other words, that the cake increases its size but the only way is through the increased income of producers and consumers.

5. Effect on the nominal and real income

An augment in the remunerations of the factors of production represents other problem: the situation of the nominal and real income. When nominal income increases the real income tends to decrease, because the purchasing power is affected by inflation. So that it is necessary to take measures to diminish the effects of inflation after an increase of the nominal income.

6. Potential demand and effective demand

Advertising has other important economic effect: as a result of advertising, consumers know the products and services that exist in the market; sometimes they cannot buy products because they have not enough money; this is the potential demand. This becomes effective demand when people obtain the money to buy.

7. Only the macroeconomics policies modify the market

Only the big decisions of economic policy change the quantitative structure of the market; those policies are the monetary, fiscal and financial policies, the concrete policies of production in the primary and secondary sectors: energy, mining, agriculture and industry and the policies in the commercial and services sector.

But the most important policy is the policy of employment and wages; it determines the wellbeing of society. Without jobs and appropriate salaries there is not possibilities of social progress. The governments set the minimum wage and create incentives or perturbations to the generation of employment in the private sector of the economy, so that the attitude of the governments is key to increase the effective demand of the society.

Moreover, the governments, through the public spending are the locomotives of the economy. The public spending is essential for the collective wellbeing. The restriction of the public spending only brings more poverty, unemployment and less consumption.

8. Advertising, economic growth, balance or recession

Economic growth is the net accumulation of capital and is a consequence of new investment; economic growth is what creates new jobs.

The other economic option is the balance, the status quo, which is a result of the replacement investment.

Other economic alternative is recession, which is a consequence of the reduction of the volume of investment and consumption.

The investment in advertising has a special feature: advertising is made the same in times of economic expansion, balance or recession. It is obvious that in times of expansion the investment is most. However, still in the most adverse economic circumstances advertising stay in the market.

9. Conclusions

- Advertising does not increase the size of the market, its quantitative structure; therefore it is not a tool for the economic growth.

- Quantitative market structure augments only due to the expansion of the factors of production remunerations.

- On the contrary, advertising changes the qualitative structure of the market because it forces competitors to improve their products and services.