Pack 2 Flashcards
How is AD calculated
C + I + G + (X-M)
-The I stands for investments
Define consumer spending
Spending in goods and services by households
Explain the 4 factors affecting consumer spending (W.I.R.C)
Real disposable income - If disposable income decreases, consumer spending is likely to decrease.
Wealth - If wealth increases then individuals have a larger number of personal assets to fall back on. This leads to more consumer spending.
Consumer confidence - More consumer confidence means consumers are feeling more optimistic leading to greater spending.
Interest rates - Lower the interest rates, the more consumer spending is as there is less incentive to save as there is smaller savings.
Define saving
Disposable income - spending
Explain the 4 factors that encourage saving (C.I.I.G)
Higher INCOMES means households are able to save more.
Higher INTEREST RATES lead to more incentives to save money with a bank. Interest rates have direct relationship with saving.
Less CONFIDENCE AND FUTURE EXPECTATIONS can lead to more saving since less spending.
GOVERNMENT taxing the interest on savings meaning most ppl pay no income tax on interest earned. Encourages ppl to save for retirement.
Distinguish between gross and net investments
Gross - total amt spent on investment before taking any account of depreciation of assets
Net - total amt spent on investment after taking any account of depreciation of assets
Explain the factors affecting investment levels
Rate of economic growth - Greater incomes so demand increases, this leads to firms investing.
Amount of spare capacity - If a firm has lots of unused resources there’s less need to invest.
Business expectations and confidence - If confidence is low, consumption decreases which leads to investment being risky.
‘Animal Spirits’ - Forces that make markets move in large booms.
Rate of interest - A cut in rate of interest would raise investment as consumers are likely to be spending more money.
Access to credit - Easier access to credit will mean more firms invest.
Define government spending
Spending by the public sector on goods and services
Explain the 3 types of government spending
Capital expenditure - Long term investment e.g hospitals or infrastructure.
Current expenditure - Day to day expenditure on goods and services to keep services working e.g wages on teachers or nurses.
Transfer payments - Payments made by the state in the form of tax revenue to individuals e.g benefits.
Factors affecting level of government spending
Trade cycle - In a recession the government may end up collecting less tax revenue due to lower income tax leading to less investment.
Fiscal Policy - Government spending extra money in order to kickstart an economy out of a recession.
Other factors - Social pressures will influence government spending.
