3.2 Households

Factors affecting spending of households

1) Disposable Income

2)Wealth of individuals

3)Confidence

4)Interest Rate

5)Advancements in technology

6)Age

7)Culture

8)Distribution of Wealth

How does Disposable income affect spending

People have more to spend on goods on services and will spend more in total

What is disposable income

Income earned by individuals after the deduction of direct taxes, amount a person has to spend on goods and services.

What is real income

The purchasing power of income, number of goods and services that income can get.

How does wealth of individuals affect spending

More wealth means that households will have more money to spend and will increase confidence as people feel richer so will spend more

How does confidence effect spending

People will be more optimistic about future career prospects and and income so are more likely to spend more. If they are pessimistic about future career prospects and and income they will spend

How does interest rate affect spending

Lower interest rate means high reward of saving low cost of borrowing more borrowing less saving people have more disposable income so will spend more

How does Income distribution affect spending

Less people with high incomes who tend to save a larger proportion of their income rather than less high income people who spend a larger proportion.

How does advancements in technology affect spending

Increases expenditure as new products encourage people to replace existing products

How does age affect spending

People tend to spend a smaller proportion of their income as they age cause they make more money as they age

How does culture affect spending

Some countries have a positive attitude to spending like USA so people will tend to spend more

Dissaving

Spending more than your disposable income

Rich vs Poor spending

Rich spend more in total on necessities and luxuries than poor, but rich spend a lower proportion of income than poor on necessities and a larger proportion of their income on luxuries

Why do people save

Target savers

Retirement

Caution

Finance children

Earn Interest

Secure place to deposit savings

Factors affecting Saving

Income

Wealth

Interest Rate

Tax Treatment of Savings

Range and quality of financial institutions

Age structure

Social Attitudes and culture

How does income affect savings

As disposable income rises, the total amount and proportion saved will increase as people have more money left even after spending on necessities and products they want.

How does wealth affect saving

Wealthier people find it easier to save as they have greater ability.

How does interest rate affect saving

Higher reward for saving, Encourage people to save more money in banks and take advantage of higher interest rate.

How does tax treatment of saving effect saving

If there are tax concessions Decreasing taxes on earnings made on savings it will increase the after tax interest income, encouraging people to save, increasing saving

How does the range and quality of financial institutions affect saving

more variety ot saving opportunitites so people more likely to find one that suits them. Greater confidence in banks to pay interest and repay amount depositted

Age

Young people make less income so less proportion to save and dont think about retirement. Older people are closer to retirement so care more about it and make more income so have a larger proportion to save.

Social attitudes and culture

Some countries like Japan have positive attitude to saving so people will save more like Japan

What is borrowing?

Moves money from people who don’t want to spend it now to people who need money more than they currently have.

Why is easier for the rich to borrow than the poor?

High wealth so can afford a collateral which banks can take if loan is not repaid

Banks more willing to lend to rich people as they are more confident that they will be able to repay the loan.

Reasons for borrowing

To fund expensive items like car or holiday

To purchase a property like a house which is called mortgage

To start up a new business

To fund large projects like business expansion into new countries

To fund current expenditures

Factors which affect the level of borrowing

Availability of loans and overdrafts

Interest Rate

Confidence

Social Attitudes

Availability of loans and overdrafts affect on borrowing

Easier it is to borrow, more likely people are to borrow

Interest Rate affect on borrowing

Increase the cost of borrowing so likely reducing borrowing

Confidence affect on borrowing

If people are more confident and optimistic about the future, they will anticipate earnings in the future, so may finance extra expenses by borrowing expecting they will be able to repay the loan with higher income.

Social Attitudes effect on borrowing

Some countries and groups are more concerned about the risk of people getting into debt by borrowing than others so will be less likely to borrow