Thursday, 26 May 2011

Aggregate Demand - Consumer Expenditure (Macroeconomics)

As stated in the previous post, consumer expenditure makes up part of aggregate demand. It is also referred to as consumption. There are many factors that affect the size of consumer expenditure in an economy:

  • Disposable income. This makes up the largest part of consumption. If people's real disposable income is high then you'd likely see high consumption, if real disposable income is low then you'd expect to see low consumption. 
  • Wealth. The wealthier people are, in the form of things such as their home and cars, the more likely people are to buy and consume goods - thus increasing consumption.
  • Confidence. The confidence of consumers also plays a big part in consumption. If consumers are confident with spending and have high expectations for the future - maybe they feel safe in their job, then they are likely to purchase  more, boosting consumption. If consumers aren't confident then they are more likely to save their money than spend and consumption will fall.
  • Interest rates. Generally, a lower interest rate will mean more consumption. This is because it is cheaper for consumers to take out loans to pay for expensive items such as houses or cars and also because they won't be earning much money on savings so it is beneficial to spend. 
  • Inflation. High inflation, means higher prices and thus lower consumption. Vice versa as well, of course.

Obviously, there are other factors that will have a minor effect on consumption other than these ive stated. Next up will be investment, stay tuned. Thanks!

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