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.