"Explain what determines the level of Consumption expenditure (C) in an economy?" (15)
Consumer expenditure is also known as consumption. It is, for most countries, the largest component of aggregate demand. It is spending by households on items such as clothing, food and insurance. Investment is the most volatile component of aggregate demand. Spending on capital goods, such as delivery vehicles, machines and office buildings, may rise by 60% one year and fall by 20 % the next.
Consumption expenditure (C) is one of four elements, which represents the total spending on goods and services produced in an economy. This is known as Aggregate Demand.
Firstly, a change in real disposable income is the main factor that determines the level of consumption expenditure in an economy. Richer households and richer countries tend to spend more on goods and services in total than poorer ones due to having more money to spend. The proportion of income that is spent (average propensity to consume -APC-) may, however, fall as disposable income rises. In addition, this would lead to a shift to the right in the Aggregate Demand curve.
Furthermore, changes in interest rate are a key determinant of consumption expenditure. This is because higher interest rates lead to a decrease in spending by consumers. People will be able to save more and will be able to pay back more money to mortgage repayments. However, a fall in interest rate will usually stimulate a rise in consumer expenditure. This is because it makes it cheaper for consumers to borrow in order to buy expensive goods such as cars. It also reduces the incentive to save because by spending now people are giving up less interest. The third reason is that those who are paying interest on a mortgage or on any other type of loan will have more money to spend. On the other hand, net savers (those who save more money than they borrow) will lose out if the rate of interest falls. Net savers, however, spend a smaller proportion of their income than borrowers do. So the fall in spending from net savers is usually
Consumption expenditure (C) is one of four elements, which represents the total spending on goods and services produced in an economy. This is known as Aggregate Demand.
Firstly, a change in real disposable income is the main factor that determines the level of consumption expenditure in an economy. Richer households and richer countries tend to spend more on goods and services in total than poorer ones due to having more money to spend. The proportion of income that is spent (average propensity to consume -APC-) may, however, fall as disposable income rises. In addition, this would lead to a shift to the right in the Aggregate Demand curve.
Furthermore, changes in interest rate are a key determinant of consumption expenditure. This is because higher interest rates lead to a decrease in spending by consumers. People will be able to save more and will be able to pay back more money to mortgage repayments. However, a fall in interest rate will usually stimulate a rise in consumer expenditure. This is because it makes it cheaper for consumers to borrow in order to buy expensive goods such as cars. It also reduces the incentive to save because by spending now people are giving up less interest. The third reason is that those who are paying interest on a mortgage or on any other type of loan will have more money to spend. On the other hand, net savers (those who save more money than they borrow) will lose out if the rate of interest falls. Net savers, however, spend a smaller proportion of their income than borrowers do. So the fall in spending from net savers is usually