Consumption (C) [2.2.2] Flashcards
What is consumption?
The total money spent on final goods and services by individuals and households for personal use.
Consumer spending very important determines of short term economic performance primary component of AD
What are personal consumer expenditures?
Value of goods and services purchased by a nations residents (similar to GDP)
Examples are like leisure clothes healthcare tourism.
Why is consumer spending so important?
Expenditure is important to keeping an economy afloat and stimulating economic growth and will prevent recissions.
What would happen if consumer spending declined?
When AD falls it can cause a recission inflation is determinantal to spending
How does low inflation rates encourage more consumption?
Low inflation encourages more spending and consumers have more money to afford goods and services
How has technology impacted consumption?
Lowered needs for fuels and committees can spend more to purchase goods driven disinflation pressure
Why are companies worried about future consumer spending?
For huge firms recessions are a huge worry tighter spending and a smaller labour pool. Political stability can cause an economy to slow down.
What type of consumer spending is likely to increase in the future?
Healthcare larger part of consumer spending as a greater proportion of older people.
What are some of the general factors that affect consumption?
Real income
House prices
Unemployment rate
Inflation and cost of living
Consumer confidence
Demographics
Interest rates
Tax rates
Welfare benefits
Availability of credit
What are some of the factors that impact consumption?
Real disposable income
Employment and Job security
Household wealth
Expectations and sentiment
Market interest rates
How does real disposable income affect consumption?
Real income is income adjusted for inflation and after taxes.
Changes in real income have the greatest impact on consumption. Real income will change as a result of above inflation pay rises and changes in taxation.
Increased real disposable income will raise consumption.
Less disposable income results in consumers consuming less and being more frugal with their money.
Lower taxes = increased disposable income as long as wages are higher or with the inflation rate leads to increase AD
How does Employment and Job security affect consumption?
When labour market improves confidence and incomes will improve.
Increases in employment will lead to higher incomes and more consumers spending.
Job security encourages consumers to spend more frequently. They borrow more money and purchase more luxuries like cars.
How does Household wealth affect consumption?
A rise in wealth can increase consumer demand. A sustained increase in house prices will increase personal wealth and spending as homeowners have more housing equity available to borrow.
Housing equity is the difference between the market value of property and the outstanding mortgage loan.
How does Expectations and sentiment affect consumption?
Economic uncertainty causes spending to fall, improving animal spirits will lift demand.
Fears of rising unemployment and expectations of higher taxes will hit consumer sentiment and spending.
If don’t have enough confidence unlikely to go ahead with major purchases such as luxuries.
Shifts AD out when confidence is higher.
How does Market interest rates affect consumer spending?
Interest rates affect both the incentive to save and the cost of borrowing.
Higher interest rates increases the cost of paying the debt on a mortgage and decreases the effective DI of homeowners
Recent years central banks have increased Interest rates to control inflation impacting ability for consumers to spend due to higher mortgage repayments.
