Eco 372 - Product Purchases and the Economy

Product Purchases and the Economy

Marlene Wise

ECO/372

February 1, 2016

Alan Beideck

        Product Purchases and the Economy

My husband and I, who have been married for sixteen wonderful years, and have one son, who is a junior in high, are looking toward our retirement future and considering the purchase of a vacation home or timeshare.  When considering making large financial purchases in today’s economic climate, a person or family must to take into consideration the possible long-term effects on their financial budget and future.  Asking the questions; is the purchase valuable, will this purchase benefit our family, and are we in a financial position to make a significantly large purchase.  There are many factors to consider, not just personal obligations, but is it economically sound in today’s market. Identifying and defining the two major economic indicators; which are interest and inflation rates, will help with the decision to make the purchase of a vacation home or timeshare.  As well as, considering if these indicators will impact the supply or availability for what we will be looking for over a two year period.  By understanding the impact the price of a vacation home or timeshare might have and whether making the purchase should or should not occur.

Macroeconomic Economic Indicators

With every large purchase, there is cost associated, especially with the purchase of a house, vacation home or timeshare.  The two economic indicators that carry a major role in the final decision to make such as purchase are inflation and interest rate.  

Inflation is often distinguished as a persistent increase in prices of goods and services. “Supply and demand effects prices, even when inflation is high.  An excess supply of housing will decrease the prices; thus causing interest rates to jump” (Anari & Kolari, 2002).  Although, purchasing a vacation home is commonly looked at as a good asset or a sound investment regarding inflation.  If the demand for vacation homes are high and exceed the housing supply, it can increase the prices of this type of house available in the market.  This is also known as demand-pull inflation.  According to Dua (2007) the price of vacation housing is considered decisive to demand for such housing. The price serves as a motivating tool for buyers to invest in real estate, which can directly and indirectly affect the inflation rate.  Just as there are two side to every coin, the other side is when there is a decrease in supply, this can cause an increase in pricing known as cost-push inflation.

The second economic indicator is the interest rate. To better understand interest rates and the influence on making a decision whether to buy a vacation home now or hold off, can help an individual of family make a financially sound decision.  Buying a vacation home usually involves taking out a mortgage, or borrowing funds to make the purchase.  This action will cause interest to be added onto the principle amount borrowed to make the purchase.  “The interest rate, or annual percentage rate (APR) is the portion of the loan charged to the buyer” (Dau, 2007).  This how the lender or bank can profit for providing the consumer with a service and funds needed to make the purchase.  When interest rates are low, the consumers are more likely to borrow money, or take out loans to make the purchase.  Lower interest rates have a tendency to help the consumers make the decision to purchase.