What is consumption?
Consumption is total spending by households on consumer goods and services over a period of time.
What proportion of UK GDP does consumption account for?
About 60% of GDP (aggregate demand).
What is disposable income?
Income after direct taxes and benefits; higher disposable income tends to increase consumption.
What is the Marginal Propensity to Consume (MPC)?
The proportion of additional income spent rather than saved (ΔC/ΔY).
What is the Average Propensity to Consume (APC)?
The average amount spent on consumption out of total income (C/Y).
What did Keynes and Friedman disagree on about income and consumption?
Keynes believed the relationship was strong; Friedman argued only permanent income changes affect consumption.
What is meant by wealth effects?
Rising asset values (e.g. houses, shares) increase consumer confidence and spending, while falling values reduce both.
What is mortgage equity withdrawal?
Borrowing money secured against rising house values to fund spending on goods and services.
How do interest rates affect consumption?
Higher interest rates encourage saving, increase debt costs, and reduce borrowing, lowering consumption.
What is the availability of credit?
The ease with which banks lend; when credit is easily available, consumption increases.
What are animal spirits?
Consumer confidence or pessimism about future income and wealth affecting spending and saving.
How does consumer optimism affect spending?
Optimism increases spending and borrowing, while pessimism reduces them.
How can inflation affect consumption?
If people expect higher prices, they may spend more now; but uncertainty or eroded wealth usually reduces consumption.
How does unemployment affect consumption?
Higher unemployment raises precautionary saving and reduces spending; lower unemployment boosts confidence and spending.
How do tax rates influence consumption?
Higher direct or indirect taxes reduce disposable income and spending; tax cuts may not raise spending if savings rise.
How does household composition affect consumption?
Young and elderly spend a higher proportion of income than the middle-aged; demographic shifts change consumption patterns.
How does income distribution affect consumption?
Redistributing income from rich to poor increases consumption and reduces saving.
What is the relationship between consumption and saving?
They are directly related—factors increasing consumption reduce saving, and vice versa.
saving
Saving is a decision by people to postpone their consumption until a future time; it is the part of disposable income that is not spent.
savings ratio
The savings ratio is the percentage of disposable income saved rather than spent.
How is the savings ratio calculated?
Savings Ratio = APS = Saving / Income = S / Y.
What effect does a high savings ratio have on aggregate demand?
A high savings ratio lowers consumption and aggregate demand.
What happened to the savings ratio in the early 1990s and why?
It was high due to high unemployment and high interest rates.
What has caused the fall in the savings ratio in recent years?
Consumer borrowing reached record levels, partly due to rapid house price increases.
