Consumption, Investment, Savings

• Consumption

  C= expenditure by households on goods/services

  part of circular flow of income & AD
• Causes of an increase in consumption

  - ↑ consumer confidence

  - ↑ bank loans/credit

  - ↓ interest rates

  - ↓ unemployment
• positive consequences of consumption

  - AD ↑ reducing cyclical unemployment

  - improves gov't finances

  - ↑ standard of living

  - company profits ↑ as sales, encourages investment

  - ↑ economic growth

  - multiplier effect
• negative consequences of consumption

  - ↑ consumer debt

  - B.O.P problems if imports ↑

  - inflation as economy approaches full employment (demand-pull & cost push)

  - £↓

  - environmental problems (negative externalities)
• Investment


  I= expenditure on capital goods, injection & part of AD, but also effects AS
• Causes of I

  - ↑ business confidence/expectation

  - ↑ consumer expenditure

  - ↑ profits

  - ↑ technology

  - ↑ wage costs (replace labour with capital)

  - ↓ unemployment

  - ↓ interest rate

  - fiscal policy ( G↓, T ↓)

  - monetary policy ( T ↓, Ms ↑)
• positive consequences of investment

  - AD ↑, reduces unemployment, improves public finances & profits of firms supplying capital goods

  - economic growth ↑

  - PPF & LRAS shifts to the right

  - ↑ productivity

  - ↑ efficiency

  - ↓ costs ( could help B.O.P if UK competitiveness improves)
• negative consequences of investment

  - AD ↑ can be inflationary but unlike C ↑ effects can be reducing by AS ↑

  - B.O.P problems if imports ↑

  - technological unemployment (capital replacing labour)
• savings


  S= part of disposable income not spent, leakage/withdrawal, reduces AD
• causes of S ↑

  - ↓ provision of public services (less need to save e.g NHS)

  - ↑ interest rate

  - ↑ income

  - ↑ interest rate

  - ↑ confidence in financial institutions

  - ↑ worries about risk of unemployment
• positive consequences of savings

  - AD ↓ can help to reduce inflation & less spending on imports can improve the B.O.P, £↑

  - Funds available for investment, growth may ↑, Harrod-Domar

  - ↓ production can help environment

  - ↓ in debt
• negative consequences of savings

  - AD ↓ can cause unemployment (especially cyclical) to ↑ paradox of thrift, MPS↑.. S↑ & C↓ but Y↓ + since S depend on Y, S likely to ↓ in L.R