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Economics IGCSEPDF 56
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Influences on Household Spending,
Saving, and Borrowing
A household's decision to spend, save, or
borrow is influenced by several factors:
Age:
○
Wealth:
wealth effect
Differences in Expenditure
Patterns
1. Disposable Income:
○ This is the single most
important factor.
○ As disposable income rises,
households generally spend
more.
However, the proportion of
income spent tends to fall as
income rises (Average
Propensity to Consume
falls).
○
○ Higher-income households
are able to save a larger
proportion of their income.
2. Interest Rates:
○ Saving: Higher interest rates
increase the reward for
saving, encouraging
households to save more
and spend less. Lower rates
have the opposite effect.
○ Borrowing: Higher interest
rates increase the cost of
borrowing, discouraging
households and firms from
taking out loans for major
purchases (e.g., cars,
houses). Lower rates make
borrowing cheaper and
encourage spending.
3. Confidence in the Future:
○ If households are confident
about future job security and
economic growth, they are
more likely to spend and
borrow.
○ If they are pessimistic (e.g.,
fear of unemployment,
recession), they are more
4.
5.
Spending patterns vary significantly,
particularly between high-income and
low-income households.
● Low-Income Households:
○ Spend a higher proportion
of their income.
A large percentage of their
expenditure is on
necessities like food,
housing, and fuel. This is
explained by Engel's Law,
which states that as income
○
likely to increase their
precautionary savings and
reduce spending.
Spending
and
saving
patterns typically follow a
life-cycle. Young Adults:
Tend to be net borrowers
(e.g.,
student
loans,
mortgages) and save little.
○
○ Middle-Aged: Incomes are
typically at their peak. They save
more for retirement and spend it
on their families. Elderly/Retired:
They "dis-save," meaning they
spend their accumulated savings
and
pensions
to
fund
their
retirement.
○
○
Ahousehold with more
wealth may feel more
financially secure and
therefore spend a higher
proportion of its current
income(the
).