Chapter 17- Households

Question 1

Disposable income

Answer 1

Disposable income: income after income tax has been deducted and state benefits received

Question 2

Wealth

Answer 2

Wealth: a stock of assets including money held in bank accounts, shares in companies, government bonds, cars and property

Question 3

Rate of Interest

Answer 3

Rate of Interest: Charge for borrowing money and a payment for lending money

Question 4

Average Propensity to Consume (APC)

Answer 4

Average Propensity to Consume (APC): proportion of household disposable income which is spent

Question 5

Saving

Answer 5

Saving is disposable income that is not spent

There are different forms of saving. Some are contractual, which means that people sign a contract stating that they will save a certain amount on a regular basis (pension schemes, insurance policies). The other type of saving is non-contractual and involves putting money in a bank and buying government securities, shares and property. it is very reliant on the current interest rates.

Question 6

Consumption

Answer 6

Consumption: expenditure of households on consumer goods and income

Question 7

Savings ratio

Answer 7

Savings ratio: proportion of household’s disposable income that is saved

Question 8

Average Propensity to Save (APS)

Answer 8

Average Propensity to Save (APS): proportion of households disposable income that is saved

Question 9

Mortgage

Answer 9

Mortgage: a loan to help buy a house

Question 10

Influences on Spending

Answer 10

if Disposabe Income rises, people are likely to spend more in total but a smaller proportion.
Wealth is another reason. wealth generates income, it can also be cashed, it can be used as security for loans, and it increases confidence(value of their car rieses, they feel richer and spend more).
Confidence is also important for consumption. if rate of interest rises, expenditure will fall and if people are pessimistic about future economic prospects, expentiture will fall.
Advances in technology also increase spending. Eg: a new phone with better technology would encourage a customer to replace their old one.

Question 11

Income and Consumption

Answer 11

People can either spend or save their income. The poor dont have enough disposable income to save as they need to use all their income to buy all the basic necessities. At times they arent able to afford this and have to dissave. This is when people spend more than their income by drawing from past savings or borrowing. As income rises people are able to spend and save more. As people become richer they buy more and better quality products. Even though the total amount spent rises, the proportion of incmome spent falls. Eg: a poor person who earns $100 a week will have to spend all of it to sustain himself. But a football player who earns a very high income of $80000 a week spends only $20000. Although he is spending much more than the poor person, he is spending a much smaller proportion of his income.

Question 12

Pattern of Expenditure

Answer 12

Different Income grous have different patterns of spending. The poor spend a higher proportion of their income and total expenditure on food, water and clothing than the rich. The rich spend more in total and as a proportion of their income on luxury items, consumer durables, entertainment and services. Spending patterns also vary within income groups in a coutry, according to differences in household composition, tastes and age. Households with children are likely to spend a higher proportion on recreation and eating out than households without children. Some may spend more on cultural activities while some may spend more on healthcare. The retired spend a higher proportion of their income on heating than transportation and enetrtainment, while teens spend a higher proportion on clothing and entertainment.

Question 13

Reasons for Saving

Answer 13

To gain a particular sum of money for a particular purpose
Save for retirement
Children’s future (leave inheritance or help finance their education)
Precautionary reasons (incase of emergencies, or take advantage of unforseen opportunities)
Increase their current income (more saving means more interest received)

Question 14

Influences on Saving

Answer 14

Income (higher income more saving)
Wealth (more wealth more saving)
Rate of interest (higher ROI more non-contractual saving)
Tax treatment on savings (more tax on interest less saving)
Range and Quality of Financial institutions (more variety more saving)
Age structure (young and old save less, middle age ppl save more)
Social attitudes (if saving is looked upon in high esteem, savings will rise)

Question 15

Borrowing

Answer 15

Borrowing moves income from people who dont want to spend it now to those who need more money than they currently have. Some borrow to maintain their living standards in hope that their income will rise, others borrow to make a big purchase like a house. When buying a house, most people take loans called mortgages. Borrowing allows people to spend more than their current disposable income but involves a cost in the form of interest. The poor may have a harder time borrowing as they have less security to offer which may make the lenders worried if they will be repaid.

Influences on the amount people borrow include:
The availability of loans and overdrafts (more availability more the borrowing)
The rate of interest (higher the rate of interest less the borrowing)
Confidence (more the confidence that the loan can be repaid, more the borrowing)
Social attitudes (if borrowing is held in low esteem, the borrowing will decrease)