Study Notes

Consumer Spending

AS, A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 27 Oct 2020

Consumption is spending by households on goods & services. Consumer spending is biggest single component of aggregate demand in the UK.

Components of aggregate demand for the UK in 2019 and 2020 (forecast)

Key factors influencing consumer spending

  • Changes in real disposable incomes (Yd) for households e.g. from changes in direct taxes and state welfare payments
  • Level of and changes in employment & job security
  • Availability and cost of consumer credit – affects willingness to borrow
  • Cost of servicing a mortgage (i.e. monthly interest payments)
  • Changes in asset prices such as property and shares – possible wealth effect
  • Expectations of future price changes e.g. if there is persistent price deflation
  • General state of consumer confidence / pessimism (“animal spirits”)

Consumer spending - key terms

  • Base interest rate: Set by the Bank of England, it is the rate of interest used by commercial banks as the basis for their own lending rates.
  • Consumer confidence: Expectations about the future including interest rates, prices, incomes and jobs.
  • Disposable income: Income after the deduction of direct taxes and addition of welfare benefits.
  • FTSE-100 Index: The FTSE-100 tracks share-prices of the 100 largest companies listed on the London Stock Exchange.
  • Savings ratio: The ratio of personal saving to household disposable income (usually expressed as a percentage).

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