Master of Professional Finance

Department of Finance MFIN 51023

Faculty
SubjectofTitle
Commerce and Management Studies for Managers
Economics
UNIVERSITY OF KELANIYA
Assignment Title A newspaper Article on

“An economy consists of different major sectors performing specific types of

economic activities. Why are activities of the Household sector considered as the
driving force to make the economy dynamic and grow?”

Proposed topic for the article: The Dynamic Engine of the Economic Growth

Lecturer/s Mr. C P A Karaunathilake

Dr. Prabath Morawakage
Ms. Ganga Madushani
Group Number Group A
Submission Date September 28, 2023
Student Number Student Name

1. FGS/MPF/2023/011
2. FGS/MPF/2023/034
3. FGS/MPF/2023/037
4. FGS/MPF/2023/041
5. FGS/MPF/2023/075
6. FGS/MPF/2023/074
S S. Liyanapathirana
S. R. Amarasinghe
K. N. Rathnakumara
L. M. G. S. J. Perera
A.M.S.S. Abeykoon
W A D R N Wickramasinghe

Declaration: We declare that this is a group assignment, and no part of this submission has been copied
from any other student's work or from any other source, except where we have provided explicit
acknowledgment in the text. Furthermore, no portion has been authored by another individual on our
behalf.

The Dynamic Engine of the Economic Growth

Households: The family

Around the world, 2.1 billion families share their shelter, food, and other essentials for living. In
all social, demographic, and economic processes, households play a critical role all the decisions
associated with those processes are taken at the households. Their living arrangements create
cities, and their decisions on education, and health create different industries. Their financial
decisions create the whole financial phenomenon. Every movement of the household sector will
create the waves in all the sectors of the society.

Economic activities could be elaborated in a circular flow, and Households, Firms, Governments,
and the rest of the world contributed to it in a different dimension while financial institutions
contributed by facilitating financial intermediation. Households provide factors of production to
firms and receive related income. In other way, households demand goods and services and pay
the relevant price. Further, involving the Government, households pay taxes and receive
subsidies.

With this understanding of the gravity and the power of households in the socio-economy
dimension, the relationships among economic sectors, and the circular flow of the economy, in
this article, we are about to witness the importance of the role of households in an economy as a
driving sector to make it grow and dynamic.

Growth: Pushing Production Possibility

According to Britannica, economic

growth is the process by which a nation's
wealth increases over time, or in simple
terms, it is the process of increasing
production over time or expansion of the
size of an economy over time. The
World's GDP of 100 trillion United States
Dollars has grown over time based on the
growth of production factor availability
and the advancement of technology. In simple economics, it teaches the production possibility of
an economy depends on the stock of factors of production owned and the technology used in the
production process. It creates the boundaries to which the economy can reach its full capacity.

Stakeholders of the economy will be benefitted from its growth and Economic growth pushes
this boundary further back and expands the economy's ability to produce more to widen the
production possibility, the economy should explore more factors and efficient technologies that
can be applied over the production factors. Accordingly, again the economy should be geared by
the households by providing more factors owned by them to drive the economy towards its
growth path.

With this backdrop on households and economic growth, it is appropriate to discuss the different
dimensions of households in line with their contribution to economic growth.

Household: THE Owner of the Factors of Productions

An economy, where the goods and services are produced, sold, and
bought, needs the required factors of production namely land, labor,
capital, and entrepreneurship to continue its production process.
Households own all these factors of production and make day-to-
day decisions to provide them to the economy involving them in
different capacities and roles. Every morning households dispatch 3
billion of their members to the economic process as a labor. Out of
106 Km2 of habitable land which is only 22% of the earth's surface
is mainly owned by households. 510 trillion United States Dollar
equivalent assets are owned by households and Governments
appointed by them. Most importantly entrepreneurship comes out
from the
households and it plays a key role in the
economy by organizing everything. In a
nutshell, according to Okun's law, it has
been empirically proved that increasing

unemployment will result greater drop in

GDP Growth. Accordingly, only
households can increase their supply of
factor volume to expand production and with that economic growth.

Household: THE Consumer

One of the key reasons why the household sector is a foremost player in economic growth is not
its role in the provision of production factors. It is undoubtedly the Demand Generation
dimension. Households are the last resort for all the production generated by the firms. They are
spending on their consumption of goods and services which creates the essential financial flow
that drives the production process and the economic activities. This Consumer-centered
economic process shows the households' ability to amplify the economic growth through its
consumption. If we take the recent Sri Lankan context in this regard, Private Consumption
represents 62% of the GDP (Expenditure Approach) in the year 2022.

Household: THE Stasher

While producing and consuming, in the meantime, the household sector plays a critical role in
contributing to the financial sector with their savings and investments. When households save a
part of their income after consumption and mobilize them to financial assets or other
investments, it provides the required capital requirements to the Firms and Government to grow
and expand their productions and services. More savings from the household sector will
positively impact the financial intermediation to raise money at lower cost and it will channel to
firms at lower cost where firms' borrowing cost will be lesser. Again, this will affect the growth
of the financial sector and the real sector where it directly influences the economic growth.

Household: THE Tax Payer

Governments play an essential role in an

economy by maintaining equality and fair
distribution of resources. While market
forces decide the distribution of
resources, governments are required to
interfere to balance it within every corner
of society. To do that, the government
needs to finance its expenditure with
taxation. If we take the Sri Lankan context as an example, in 2022 Tax revenue represents 88.5%
of the total revenue of the Government. Under that, 61% of them are indirect taxes where the tax
burden could be shifted to the consumer of the goods and services. Not only that, personal
income taxes under direct taxes are also paid by the households. Altogether, we can arrive that,
households provide nearly 2/3 of the government revenue. Therefore, the Government's role in
economic growth is majorly backed by the households.
Household: THE Stabilizer

Within the households, the members perform different roles to stabilize their activities. Those
activities are not being valued in financial terms. Parents care for their kids and develop the
future human capital of the economy. Partners encourage and help each other to perform their
economic roles more efficiently. Therefore, non-financial roles performed by the members of
households within the households indirectly affect their performance in the economy positively.
Therefore, the growth of the economy will be stabilized through households by absorbing the
shocks.

The Growth Factor

Considering the above roles of the households in the economy and their linkages with the
economic growth and dynamic nature of the economy. We will be able to conclude that
households are the growth factor of an economy. However, there are a few other things that
should be addressed while expecting the full potential of the households to the economy.

 The government and the firms need to contribute positively to the advancements of skill
development and education where households are burdened with most of the
responsibilities.
 Technological advancements should be carried out by Firms and Governments through
research and development to absorb the maximum benefits of the factors of production of
the households.
 Government tax policies should be progressive enough to attract households more into
the economic process.
 Government subsidy policies should be rationalized to obtain the maximum contribution
of lower-income households to the economy while improving the social safety net.
 Financial markets should be dynamic and efficient enough to attract the savings of
households.

Challenges

While performing its key role in economic growth, the household has faced several fronts on
which the importance of the same has been challenged. If we take automation and application of
artificial intelligence, exploration of new resources such as created lands, and acquiring more
factors of production by firms, households need to find solutions to face these challenges
innovatively.

Accordingly, Households that share their basic living requirements, play a pivotal role in the
economy when considering its dynamic nature and the growth that expands the size of the
economy. By providing factors of production, by consuming goods and services produced by the
firms and the governments, by providing required financial sources to expand production, by
paying taxes to maintain equal distribution of the resources within the economy, and by
stabilizing the social conditions of the economy they have proven that they are the driving factor
to the economic growth in a dynamic way. However, Governments and firms also have to create
the required environment for households to perform their role efficiently in the economy.