Consumption

Question 1

Consumer spending

Answer 1

This is how much consumers spend on g/s. This is the largest component of AD and is therefore most significant to economic growth. It makes up just over 60% of GDP.

Question 2

Disposable income

Answer 2

Amount of income consumers have left over after taxes and social security charges have been removed. It is what consumers can choose to spend.

Consumer income might come from wages, savings, pensions, benefits, and investments, such as dividends payments.

Question 3

A consumers marginal propensity to consume

Answer 3

How much a consumer changes their spending following a change in income. Consumers on low incomes are more likely to spend.

Question 4

Influences on consumer spending-interest rates

Answer 4

If the monetary policy committee lowers interest rates, it is cheaper to borrow and reduces the incentive to save, so spending increases. There are time lags between the change in interest rates and the rise in consumption. Lower interest rates also lower the cost of debts, such as mortgages. This increases the effective disposable income of households.

Question 5

Influences on consumer spending-consumer confidence

Answer 5

-If consumers have higher confidence levels, they spend more because they are less concerned about needing to save for future difficulties. This is affected by anticipated income and inflation.

-If consumers fear unemployment or higher taxes, consumers may feel less confident about the economy, so they are likely to spend less and save more. This delays large purchases, such as houses or cars.

Question 6

Influences on consumer spending-wealth effects

Answer 6

-In the UK most people own their houses. This means that a rise in the price of houses makes people feel wealthier, so they are likely to spend more. This is the wealth effect.

-A consumers housing equity is the difference between the market value of a property and how much loan is remaining to be paid. If house prices increase, consumers experience a rise in equity, so they might be paying less on their mortgage than the house is worth on the market. This makes consumers feel wealthier, so they are more willing to spend.

-This can also occur with other assets like shares.