Consumer Spending

Consumer Spending

1. Consumer income

   • Wages, savings, investment, pensions, benefits

2. Propensity to spend

   • Keynes - C depended on disposable Y
   • Low Y = ↑ propensity to spend
     • Y redistributed to lower incomes, might D
   • ↓ = ↓ C for given level of Y

3. Marginal propensity to consume

   • Rate which consumers ↑ C as Y ↑
   • Extra £2000 in a year, spend £1500
     • M. propensity to consume: 1500/2000 = 0.75
     • M. propensity to save: 500/2000 = 0.25

4. Mortgage Interest Rates

   • If ↓, effective disp. Y ↑
     • ↑ purchasing power to buy G & S
   • Many have fixed rate mortgages
     • Change interest rate ≠ immediately affect
   • 2009 lowered = ↑ spending power, ↑ confidence

5. Wealth effect

   • Value of a stock of assets
   • +ve relationship - wealth and spending
     • Real value of savings and interest payments = direct effect on spending power
   • Rate of interest < rate of inflation
     • ↓ real purchasing power of savers

6. House prices

   • 2004-07: surge as credit boom
   • 2009: recession ↓ prices
   • 2013: rising

7. Share prices

   • FTSE-100 tracks share price movement in 100 largest companies
   • Rise = ↑ C if ↑ confidence
   • ↑ spending power from ↑ share dividend payments
     • Dividend Y adds to disp. Y

8. Borrowing

   • Unsecured
     • Loan not tied to value of another asset
     • Bank loans, credit cards
   • Secured
     • Use another asset as collateral for loan
     • Mortgage
       • Fail to repay, lender may repossess property
     • Majority of debt
       • Housing market significant in influencing C and financial stability
     • Annual growth rate of consumer credit in high street banks ↑
       • 2011: -2.8% 2015: 4.6%