Aggregate Demand - Consumption (c) and savings (s) Flashcards
Characteristics of AD
Consumption C: consumer spending on real output; spending on non-
durables, durables & services; the largest component of AD, usually about
60%
Capital Investment I: spending on capital goods; spending on plant,
equipment etc. That help produce more consumer goods in future;
investment demand comes from both private and public sector
Government consumption G: spending by the government on its current
day-to-day provision of public services such as healthcare, education,
defence and transport. Does not include transfer payments (pensions and
welfare benefits)
Net trade (export demand X - import demand M): exports X are an inflow
of demand from citizens abroad (inflow); imports M refers to domestic
demand for foreign-produced goods (outflow).
Benefits and costs of rising consumption
- Rising AD
- Faster short run economic growth
- Less spare capacity
- Falling unemployment
- Gives businesses confidence to
invest - Inflation pressure
- Current account deficit (more
imports sucked in) - Unbalanced growth
- More household debt
- Could be bad for environment
Factors influencing Consumption (C)
Income: especially real disposable income; typically more income means
more consumer spending.
Wealth effect: an increase in the value of assets (property, shares etc.)
encourages more consumer spending through a positive wealth effect.
Consumer confidence: high confidence leads to more consumer spending.
Job security: low unemployment can make people less worried they may
lose their job and so they spend more.
Interest rates: affect the cost of borrowing; spending on big ticket items
such as houses, cars and white goods are likely to rise when interest rates
fall.
Demography: a growing population (e.g. immigration) spending more
(And vice versa for factors causing a fall in consumption).
Importance of saving for an economy
- Savings flow into financial markets and businesses can access these funds
to invest
* Savings provide households with a cushion of financial stability and funds
for the government when it needs to borrow.
Paradox of Thrift
The Keynesian paradox of thrift is an economic theory which states that an
increase in saving can lead to a decrease in economic activity and, ironically, a
decrease in overall saving.
Related concepts
Average propensity to consumer (APC)= C/Y
Marginal propensity to consume (MPC) = change in C/change in Y
Average propensity to save (APS) = S/Y
Marginal propensity to save (MPS) = change in S/change in Y
where Y = national income, C = consumption, S = saving
