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