Lesson 14 - Consumption + Savings Flashcards
What is consumption?
Total spent on final goods + services by individuals + households for personal use
What are personal consumer expenditures?
Value of goods + services purchased by a nations people
E.g., Travel, clothing food
What would happen following a decline in consumer spending?
Workers laid off
Shop closures
Firms into administration
Give 5 factors that can affect consumption
Disposable Income
Employment + Job security
Household Wealth
Expectations
Interest rate
How does disposable income affect consumption?
Has greatest impact
Increased/Decreased spending power
Changes due to wage, inflation + taxation
How does employment + job security affect consumption?
Increased employment, higher incomes + consumption
Job security encourages borrowing + durable/valuable purchases (House, car etc..)
How does household wealth affect consumption?
Rise in house prices allows homeowners to borrow more housing equity
What is housing equity?
Difference between market value of property + outstanding mortgage loan
How do expectations affect consumption?
Fears of rising unemployment + taxes affect consumer sentiment + spending
Lack of confidence, likely to go ahead with major purchases
How does the interest rate affect consumption?
Low rate - Cost of mortgage debt cut
Increases effective disposable income
Cutting interest rate increases consumer demand
What is the marginal propensity to consume/save?
Proportion of extra income earned that can be spent/saved
What were Keynes’ theories about consumption?
Households have 2 options - Spend + Save
At low income levels, people spend all of their income
As incomes increase, people will save higher % of income
The rich have higher propensity to save
What are savings?
Household disposable income that is not spent
Occurs when people postpone spending
What are the impacts of higher savings?
Finances higher investment - Boosts productivity
