Consumer Spending Flashcards
What is consumption
Spending by households on goods & services
What is the biggest single component of aggregate demand
Consumption
What is the base interest rate
Set by the Bank of England - it is the rate of interest used by commercial banks as the basis for their lending rates
What is the consumer price index (CPI)
A measure of the price level based on the prices of a collection of goods and services that are designed to reflect the consumption basket of the average consumer / household
What is disposable income
Household income after the dedication of taxes and addition of welfare benefits
What is FTSE-100 Index
It tracks the share-prices of the 100 largest companies listed on the London Stock Exchange, based on their market capitalism
What is the savings ratio
The ratio of personal saving to household disposable income
What is unemployment
The official definition includes someone who is either out of work and actively looking for a job or out of work and waiting to start a job in the next two weeks
What is VAT
A tax on consumption, which is paid to the tax authorities by the seller on behalf of the consumer. The standard UK VAT rate is 20%
What is the marginal propensity to consumer
The rate at which consumers increase their spending as income rises
What is the rule with marginal propensity to consume
The marginal propensity to consume + the marginal propensity to save must always = 1
Propensity to save is power for who
People in lower incomes
What are some factors that may have an influence on the total level of consumer spending in an economy
- real incomes
- direct and indirect taxation
- interest rates
- household wealth
- consumer confidence
- supply of credit
- distribution of income
- demographics
How is consumer confidence measured
Using surveys that ask people about their own financial situation
What happens when consumer confidence is low
People save more because of low job security
What is consumer confidence affected by
- economic growth
- household debt
- unemployment
- house prices
What happens if mortgage interest rates fall
Effective disposable income of families with a mortgage will rise giving them more purchasing power to buy other goods and services
What has recently caused a cut in the real purchasing power of savers
The average rate of interest on U.K. savings deposits have less than the rate of inflation
House prices U.K.
- increased 2004-2007 (credit boom)
- decreases 2013 (recession)
- continued to rise after
What might a rise in FTSE-100 help to do
Increase consumer spending if it causes a rise in confidence
What is unsecured borrowing
A loan or an overdraft not tied to the value of another asset e.g. student loan
What is secured borrowing
Lending where the borrower must use another asset as collateral for the loan e.g. a mortgage with a bank of building society
