3. UK consumption led Flashcards
What is the wealth effect?
increasing house prices increases households’ propensity to borrow and consume. Consumers tend to save less and spend more
What is the credit effect?
rising house prices increase borrowing and consumption by raising the value of housing collateral against which homeowners can borrow
What does the credit and wealth effect lead to:
Translate to higher levels of aggregate demand. Falling house prices translate; therefore, to lower level of consumption, and consequently lower economic growth
What is UK’s growth model? And what does it rely on?
- It is a Credit and consumption led growth model
- Reliance on household debt and private consumption as growth engines.
What was the UK’s growth model before?
Wage-led growth model
Does the credit/consumption have weakness?
Yes, seen during the financial crises, when house prices dropped.
What is the role of the housing channel in the UK growth model?
It says that property prices drive borrowing and consumption. Meaning more demand = growth
How does the income-maintenance channel support consumption?
- People borrow money to replace low wages and weak welfare.
- Helps maintain living standards during income shocks.
What are the pros and cons of Labour’s economic policies?
Pros: Focus on redistribution, public investment in housing, healthcare, and education.
Cons: Risk of higher government debt and economic inefficiencies.
Why is high government debt an obstacle to economic growth in the UK?
- Limits public investment.
- Forces reliance on private credit to drive growth.
What are the risks to the UK economy post-Brexit?
- Loss of access to European markets and supply chains.
- Reduced foreign capital inflows could weaken credit markets.
