HOUSEHOLDS
SPENDING/ Consumer spending
Spending refers to expenditure on goods and services e.g. food, clothing,
footwear, accommodation, leisure, transport, etc.
Factors that influence spending include:-
1. Disposable income
This is income that one remains with for spending and saving after
paying direct taxes and other compulsory payments. High disposable
income increase expenditure.
2. Wealth
This refers to the stock of assets owned by an individual in money
held in bank accounts, shares in companies, government bonds, cars
and property. High wealth encourages expenditure because wealth
generates income, wealth can be cashed in, and wealth can be used
to secure loans.
3. Confidence i.e. optimism about the future vs pessimism.
Optimism encourages people to spend more and pessimism about
future economic prospects will reduce expenditure.
4. Interest rates.
Lower interest rates on borrowing encourage people to borrow and
hence increase spending.
5. Distribution of income
Fair distribution of income leads to high spending as more people
have money to spend.
6. Advances in technology
This encourages people to spend more on new items like cars,
mobile phones and laptops to replace the old ones.
7. Inflation
High inflation rates discourage spending as people prefer to spend
less and save for the future amidst the uncertainties created.
8. Age
9. Size of households
Large size households generally spend more than the smaller
member households because they have a higher demand for goods
and services.
Relationship between income and consumption
The poor usually spend all their income and hence save very little. They
sometimes spend more than their incomes hence they resort to dissaving
i.e. drawing from past savings or borrowing.
As incomes rise, people spend more i.e. the amount spent increases but
the proportion spent may be falling.
The proportion of income which people spend is called Average
Propensity to Consume (APC). It is calculated by dividing consumption
by disposable income.
The relationship between disposable income and
consumption
Disposable Consumption APC
Income
100 120
200 200
300 270
400 320
Illustration
SAVING
This refers to the process of devoting part of an individual’s or firm’s or
government’s income for future use.
Forms of saving include:
i) Contractual saving
Here, people sign a contract agreeing to save a certain proportion
of their income on a regular basis e.g. through insurance policies
and pension schemes.
ii) Non-contractual saving
This involves saving where no contract or agreement is involved
e.g. placing money on bank accounts, building society accounts,
buying government securities, shares and property.
Reasons for saving
i. Target saving i.e. saving to get a particular sum of money for a
particular reason e.g. to buy a car or a home.
ii. Saving for retirement
iii. For precautionary purposes or emergencies e.g. in case of job
loss, sickness or death.
iv. For their children’s future i.e. to inherit
v. For capital gain i.e. to take advantage of unforeseen opportunities
vi. To increase their current income e.g. through interest earned on
the savings.
Factors that influence the level of saving
i. Level of income: High disposable income leads to high level of
saving i.e. the total amount saved and the proportion saved
increases.
ii. Wealth. The wealthy find it easier to save than the poor.
iii. Interest rate on savings. High interest rate on savings
encourages people to save
iv. The tax treatment on savings. Tax concessions on savings will
encourage people to save
v. The range and quality of saving institutions available. With
many institutions of high quality, more people are encouraged to
save as it builds their confidence to save more.
vi. Age structure. The young and old usually save more than the
middle age groups who have more responsibilities.
vii. Social attitudes towards saving. Positive attitude encourages
people to save
Income and saving
Since saving is disposable income which is not spent, people save more as
income increases in terms of amount and proportion.
Average propensity to save (APS) is the proportion of total income that is
saved. This usually increases as income rises.
APS is got by dividing the savings by the total income
APS =Savings/Income
APS is the same as the savings ratio or savings rate
The relationship between disposable income and saving
Disposable Consumption Savings APS
income
100 120
200 200
300 270
400 320
Note: APC +APS = 1
BORROWING
This occurs when an individual, firm or government takes out a loan from a
bank or financial institution with hope of paying it back with interest.
N.B. Interest is the cost of borrowing i.e. the payment to capital for its role
in the production process.
Borrowing leads to debt which has to be managed.
Reasons for borrowing
- To fund purchase of expensive items
- To purchase a property/ land or take out a mortgage
- To start a business in order to earn profit
- To fund their own education or that of their children
- To fund large projects such as business expansion in foreign
countries.
- To fund current expenditure in the event of job losses or economic
decline.
Note should be taken of the fact that borrowing usually requires collateral
security especially if it is from banks and other financial institutions.
The poor have more need for borrowing but have more difficulty in
borrowing because of lack of security and lenders don’t usually trust them
to keep up interest payments and pay up the loans.
Factors that affect borrowing (influences on borrowing)
- The availability of loans and over drafts: the easier it is to borrow,
the more likely people are to borrow
- The rate of interest on loans: A rise in the interest rate will increase
the cost of borrowing which is likely to reduce borrowing.
- Confidence about the future: The more confident people are about
the future, the more they will anticipate earning in the future hence
increasing their current spending and borrowing to fund extra
expenses.
- Social attitudes towards borrowing: Some people are more
concerned about the risks of getting into debt by borrowing than
others.
