The wealth effect refers to the tendency of people to spend more when their perceived wealth increases — for example, when stock prices or property values rise.
When asset prices like stocks or real estate increase, people's net worth rises and they feel wealthier. This psychological feeling encourages higher consumer spending. Conversely, when asset prices fall, consumers cut back on spending.
The wealth effect can be positive for the economy as it boosts consumer spending and accelerates growth. However, when asset bubbles burst, the reverse wealth effect can trigger sharp spending declines.
In Bangladesh, the wealth effect is visible, particularly in the housing sector and stock market fluctuations. When share prices rise on the Dhaka Stock Exchange, consumer spending tends to increase slightly, and when they fall, consumer confidence drops.