ec140 notes

13.1 Consumption, Saving, and Income

  • Learning Objective: Understand how consumption and saving vary with income.

Consumption Overview

  • Consumption refers to household spending on final goods and services.

    • Largest component of GDP (over three-fifths of total spending).

    • Includes spending on necessities and services (food, rent, clothes, etc.).

    • Excludes the purchase of new homes (counted as investment).

Relationship Between Consumption and Income

  • Income: Key factor determining consumption.

    • Consumption Function: Shows relationship between consumption and income, plotting total consumption against total income.

    • Upward-sloping function indicates higher income leads to higher consumption.

    • Shape may vary based on consumer choices.

Marginal Propensity to Consume (MPC)

  • Indicates how much consumption rises with an increase in income.

    • MPC measures the fraction of additional income that is spent.

    • Ranges from 0 (savings) to 1 (all income consumed).

    • Example: An average MPC of 0.6 means a $10 billion rise in income leads to a $6 billion increase in consumption.

Data Interpretation

  • Consumption and income data analysis shows the expected inverse relationship.

    • Scatterplot of Canada’s average consumption vs. GDP per person shows upward trend.

    • Local and international patterns confirm higher consumption correlates with higher GDP.

Saving and Income

  • People save the portion of income they do not spend on consumption.

    • Saving vs. Consumption: Two sides of the same coin; higher spending contributes to potential debt.

    • Dissaving: Occurs when spending exceeds income, often through borrowing or withdrawing savings.

Importance of Saving

  • Microeconomic perspective: Saving increases personal wealth for future consumption.

  • Macroeconomic perspective: Savings provide resources for investment in the economy.

    • Focus on flow of savings over time.

    • Net wealth: Assets exceeding debts.

Practical Application

  • Assessment of personal financial planning post-graduation.

    • Consider different income levels and spending habits.

    • Build a consumption function based on responsible saving and spending choices.

    • Acknowledge that increased income typically leads to increased consumption, but consumption growth is slower than income growth.

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