2.2.2 Consumption (C)

• Disposable income is the money that households have left from their salary/wages after they have paid their taxes and have received any transfer payments/benefits
  • If taxes increase, then disposable income decreases - and vice versa
  • If wages fall, then disposable income decreases - and vice versa
  • If transfer payments to a household increase (e.g. Unemployment benefits), then disposable income increases - and vice versa
    
    
• Consumption increases as disposable income increases
• Consumption decreases as disposable income decreases

• Disposable income can either be saved or spent on goods/services (consumption)
  • When savings decrease, consumption usually increases
  • When savings increase, consumption usually decreases
    
    
• The household savings ratio calculates household savings as a proportion of household income
  • This percentage is often low when an economy is booming and full of confidence - and vice versa
  • During lockdown in 2020 this ratio reached a record high in the UK of around 25%

   Changes to Interest Rates

• Interest rates are set by the government's Central Bank
  • Changes to the base rate cause commercial banks to change the lending and saving rates they offer customers
    
    
• A change in interest rates will change the level of consumer spending and savings
  • If interest rates increase there is a greater incentive to save
    • More saving = less consumption
  • If interest rates increase, the monthly repayment on any loan or mortgage increases
    • Higher loan repayments = less consumption

   Changes to Consumer Confidence

• The stronger the economy, the higher consumer confidence
  • Consumers feel secure in their jobs and are confident of receiving regular salary payments
    • Consumption increases and saving decreases
      
      
• In a weakening or recessionary economy, consumer confidence falls
  • Consumers feel less secure in their jobs
    • Consumption decreases and saving increases

   Changes to Wealth

• If consumer wealth increases, then consumption usually increases
  • Rising property prices or share prices give consumers confidence to borrow more money
    • Increased borrowing = increased consumption