Spending, Saving & Borrowing (CIE IGCSE Economics)

• Spending in an economy is also called consumption
• The level of consumption by households is heavily influenced by income, interest rates & the level of confidence in the economy

The Influences On Household Spending & Consumption

Changes to Income	Changes to Interest Rates	Changes to Confidence Levels
Disposable income is the money that households have left over from their salary/wages after they have paid their taxes & have received any transfer payments/benefits from the government Consumption increases as disposable income increases &  decreases as disposable income decreases	Interest rates are set by the government's Central Bank Changes to the base rate cause commercial banks to change the lending rates they offer customers If interest rates increase then the cost of borrowing increases. Higher borrowing costs = less consumption If interest rates increase, the monthly repayment on any existing loan increases. Higher loan repayments = less consumption	The stronger the economy, the higher consumer confidence. Consumers feel secure in their jobs & are confident of receiving regular salary payments. Therefore consumption increases In a weakening or recessionary economy, consumer confidence falls. Consumers feel less secure in their jobs & consumption decreases

• Disposable income can either be saved or spent on goods/services (consumption)

  

The Influences On Household Saving

Changes to Income	Changes to Interest Rates	Changes to Confidence Levels
When disposable income increases, the proportion saved depends on the overall income level of the household Low income households will spend any additional income on necessities or a few basic luxuries - little additional saving occurs Medium income households will increase both consumption & savings High income households will usually increase their savings (or asset purchases) significantly	Changes to the base rate cause commercial banks to change the savings rate they offer customers An increase in the savings rate offered by commercial banks incentivises households to save more An decrease in the savings rate offered by commercial banks disincentivises households from saving & encourages consumption	Households tend to save when they are more fearful of the future The stronger the economy, the higher the consumer confidence & the lower the level of household saving The weaker the economy, the lower the consumer confidence & the higher the level of household saving

• Households borrow money from friends, relatives, money lenders & commercial banks
• Commercial banks usually require security in order to extend a loan
  • The need for security often prevents low income households from accessing bank loans at competitive rates  
      

The Influences On Household Borrowing

Changes to Income	Changes to Interest Rates	Changes to Confidence Levels
When disposable income increases, household borrowing often increases due to the ability to make additional monthly payments Low income households find it difficult to access commercial bank loans & if they need to borrow money, they face higher interest rate charges (e.g. payday loans or "buy now, pay later" schemes) - or they turn to money lenders Medium income households will increase borrowing as income rises High income households often receive preferential interest rates & obtain large loans to fund asset purchases e.g. luxury properties	If interest rates decrease, medium & high income households may decide to borrow more money from commercial banks, as it is now cheaper to repay There will likely be an increase in personal loans to fund travel, car purchases & home improvements Low income households are usually unable to access borrowing from commercial banks, even when interest rates fall & continue to borrow from sources that charge high interest rates	When the economy is booming, confidence is high resulting in more borrowing & consumption When the economy slows down or stagnates, confidence falls resulting in less borrowing & consumption