Consumption, Saving and investment

Consumption, Saving and investment

1. Consumption

   • All personal expenditure on goods and servicies
   • Factors that affect consumption
     • Real disposable income
       • Increases as RDI does
     • Interest rates
       • Higher rates reduce consumption because
         • Saving rises
         • Demand for goods brought on credit falls
         • Discretionary incomes fall -increase in loan repayments
     • Unemployment
       • Precautions in fear of losing jobs
       • More employment=wage rises
       • People on incomes
     • Tax burden
       • Tax cuts increase consumption
     • Population
       • Young people spend more of incomes than older 30+
         • Younger pop=more consumption
     • Wealth effects
       • If assets (houses) become worth more people feel they can spend more
     • Consumer confidence
       • Fall in confidence=fall in spending

2. Savings

   • Act of foregoing consumption
   • Why save?
     • Big ticket items
     • Retirement
     • Precautionary motives
     • Capital gains
     • Future generations
   • Lended out by banks to borrowers
     • Interest payments

3. Investment

   • Spending on assets used to create goods and servicies
   • Types
     • Fixed
       • New machinery plant, buildings, vehicles etc.
     • Working capital
       • Spending on stocks
     • Net investment
       • Difference between investment and capital deprecitation
   • Factors affecting investment
     • Changes in AD
       • Insufficient capacity=I
     • Interest rates
       • High have neg. impact on I
         • Borrowing costs more
         • Better returns by saving internal funds
         • Reduce level of AD so spare capacity
     • Profitability
       • More profitable encourages investment
     • Business confidence
     • Corporate tax levels
   • Why invest?
     • Take advantage of higher profits
     • Raise productive capacity to meet D
     • Improve efficiency
     • Exploit economies of scale
     • Create market entry barriers
   • Can lead to growth, demand, and supply increases