2.2.2 Consumption

• Animal Spirits


  Confidence or pessimism held by consumers and firms.
• Consumer Confidence


  Expectations about the future including interest rates, incomes and jobs.
• Consumer Durables


  Products that are not used up immediately when consumed and provide a flow of services over time eg washing machine
• Consumer Spending/ Consumption


  Household spending on goods and services. Consumption is 60% of the UK's AD
• Disposable Income

  Gross income less income tax and national insurance contributions plus welfare benefits. DY = Gross income - direct taxes
• Household Income

  The financial resources available to household to spend or save
• Original Income

  Income from jobs, private pensions, interest from savings
• Gross Income


  Original income + cash benefits
• Post-tax Income

  Disposable income - indirect taxes
• Household Wealth


  The monetary value of assets –including property, shares, savings, pension fund assets
• Interest Rate


  The cost of borrowing or the reward for saving expressed as a percentage
• Negative Equity


  When the value of an asset falls below the debt left to pay on that asset.
• Pension Fund


  Employees' pension benefits are invested in stocks, bonds and other assets to boost returns and ensure there are sufficient funds to retire
• Personal Allowance


  The amount of income you can earn before you start paying income tax.
• Precautionary Saving


  Saving due to fears of a loss of real income or rising unemployment.
• Saving Ratio


  The percentage of household disposable income that is saved rather than spent
• Unsecured Credit


  Credit not secured by another asset ie. credit cards
• Wealth

  Assets that generate income eg. savings held in commercial bank deposits, ownership of shares issued by PLCs and equity stakes in LTDs and real estate.
• Wealth Effect


  The supposed link between changes in wealth and household spending.
• Access to Credit


  The willingness and ability of financial institutions to lend funds to producers and consumers.
• Determinants of Consumption


  -Income

  -Inflation

  -Interest rates

  -Wealth effect

  -Consumer confidence

  -Demographics
• Life-cycle Hypothesis


  At different stages of a person's lifetime their consumption changes

  A) Savings

  B) Income Curve