ILO:
a) Disposable income and its influence on consumer spending
b) An understanding of the relationship between savings and consumption
c) Other influences on consumer spending:
o interest rates
o consumer confidence
o wealth effects
a) Disposable income and its influence on consumer spending
b) An understanding of the relationship between savings and consumption
c) Other influences on consumer spending:
o interest rates
o consumer confidence
o wealth effects
Consumer spending
How much do
households spend per week?
Disposable income
Disposable income is the income that an individual receives after having paid any
direct taxes
and received any
transfer payments
/benefits.
A positive relationship between disposable income and consumption. As higher Y levels make consumers more W&A as well as giving them confidence.
A positive relationship between disposable income and consumption. As higher Y levels make consumers more W&A as well as giving them confidence.
Relationship between savings and consumption
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Generally, as consumers save more, they spend less, and vice versa.
The (household) savings ratio gives an idea of the average extent of saving for all households in the economy. It is calculated as the percentage of disposable income that is saved. If my disposable income is £347 and I save £35. What is my savings ratio? If my disposable income is £432, and my savings ratio is 0.32. Then how much do I spend? |
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Other influences on consumer spending
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Interest Rates:
As interest rates rise, consumers have more incentive to save, as the return on saving rises, so tend to substitute saving for spending. This can be measured through consumers marginal propensity to save. This is the % of additional Y that you save. Numerical example if you received £100. MPC = 0.5 = £50 MPS = 0.5 = £50 The cost of buying on credit rises and therefore consumers are put off of the purchase of big ticket consumer durable's, as they seem relatively more expensive with the increased cost of borrowing. |
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Interest payments on any variable rate loans/mortgages already taken out will rise, reducing consumers' discretionary income.
Rises in the interest rate may also lead to a fall in average house prices (as demand for houses falls because of the increased cost of taking out a mortgage), creating a negative wealth effect in the economy.
Rises in the interest rate may also lead to a fall in average house prices (as demand for houses falls because of the increased cost of taking out a mortgage), creating a negative wealth effect in the economy.
Question:
Assess how effective negative interests rates could have a positive impact on AD in the UK? (10 marks)
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How do negative interest rates work? | CNBC Explains
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The government sets the Bank of England an inflation target to keep it in check. The Monetary Policy Committee (MPC) then decides on the interest rate.
This is usually reflected in the mortgage base rate - when the base rate is higher, interest rates on fixed rate mortgages tend to be higher. However in the current climate, although the base rate is at 0.1%, mortgage rates have remained relatively steady as banks are concerned about mortgage lending risks. As a result they have tightened their lending criteria and have withdrawn the higher LTV mortgage products. https://www.bankrate.com/uk/mortgages/bank-of-england-baseate/ |
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Consumer Confidence:
The amount that consumers spend is largely influenced by the confidence of the consumer; for example, are they worried about losing a job, confident that shares and house prices are growing, or saving because of worries about a small pension? In the United Kingdom, the consumer confidence survey measures the level of optimism that consumers have about the performance of the economy in the next 12 months. |
Consumer Confidence & Economic Cycles
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Wealth effects:
Actual changes in the economy (such as rises in the FTSE or in average house prices) can cause real spending increases if people decide to trade in their increased wealth or may simply increase confidence in spending. In contrast, falling share prices or falling house prices might cause people to reduce spending.
Consider the cause and effect of the wealth effects seen in the videos below:
Actual changes in the economy (such as rises in the FTSE or in average house prices) can cause real spending increases if people decide to trade in their increased wealth or may simply increase confidence in spending. In contrast, falling share prices or falling house prices might cause people to reduce spending.
Consider the cause and effect of the wealth effects seen in the videos below:
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Negative equity on the rise as house prices fall | 7.30
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Stock Market Crash of 2008
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Revision webinar videos
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Y1/IB 19) Consumer Spending and Aggregate Demand
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Household Saving and Aggregate Demand
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Consumer Spending
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