Spending, Saving & Borrowing (Cambridge International IGCSE Economics)
The Influences on Spending
Spec point —
3.2.1· Including income, the rate of interest and confidence – between different households and over time.
- Spending in an economy is also called consumption
- The level of consumption by households is heavily influenced by income, interest rates and the level of confidence in the economy
The Influences on Household Spending and 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 and have received any transfer payments/benefits from the government - Consumption increases as disposable income increases and 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 and 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 and consumption decreases |
The Influences on Saving
Spec point —
3.2.1· Including income, the rate of interest and confidence – between different households and over time.
- 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 and 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 and encourages consumption | - Households tend to save when they are more fearful of the future - The stronger the economy, the higher the consumer confidence and the lower the level of household saving - The weaker the economy, the lower the consumer confidence and the higher the level of household saving |
The Influences on Borrowing
Spec point —
3.2.1· Including income, the rate of interest and confidence – between different households and over time.
-
Households borrow money from friends, relatives, money lenders and 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 and 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 and obtain large loans to fund asset purchases e.g. luxury properties | - If interest rates decrease, medium and 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 and home improvements - Low income households are usually unable to access borrowing from commercial banks, even when interest rates fall and continue to borrow from sources that charge high interest rates | - When the economy is booming, confidence is high resulting in more borrowing and consumption - When the economy slows down or stagnates, confidence falls resulting in less borrowing and consumption |
Exam Hint When evaluating the influences on household spending, saving and borrowing, it is useful to consider the impact on low, median and high income households. E.g. While the poor spend less than the rich, they are likely to spend a higher proportion of their income. They are also less likely to save any additional income as it goes towards buying more necessity products
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