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Chapter 5 ECON

econ

TermDefinition
Gross Domestic Product It is the monetary measure of the total annual output of all goods and services.
GDP equation GDP = C + I + G + X
C HOUSEHOLD CONSUMPTION
I BUSINESS INVESTMENT
G GOVERNMENT SPENDING
X NET EXPORTS
CONSUMPTION THE PURCHASE OF GOODS AND SERVICES BY HOUSEHOLDS.
Households One or more people living in a building. All families are households. Households include more than families.
Three types of Household Consumption: 1) Durables 2) Nondurables 3) Services
Durables any product that lasts longer than 3 years (cars, dishwashers)
Non-durables any product that lasts fewer than 3 years (most clothes, canned food
Services work done by doctors, hair stylists
Consumption equation The normal pattern is that: As family incomes rise – consumption rises, but not as quickly. The difference = savings
Average Propensity to Consume APC = Average Propensity to Consume APC = Consumption Disposable Income APC = Percentage of disposable income that is spent Disposable Income = after tax income APC – for a fixed time period
Marginal Propensity to Consume MPC = Marginal Propensity to Consume MPC = Change in Consumption Change in Income MPC – changes in spending over time
What influences savings rates? 1) Income 2) Interest rates 3) Inflation
Income This is the most important factor. Higher incomes lead to more savings, sooner or later.
Interest Rates The higher the interest rates, the more reward for savings, therefore savings goes up.
Inflation The higher the inflation rates, the less reward for savings, because the value of money goes down. The higher the inflation rates, the less savings.
Average Propensity to Save APS = Average Propensity to Save APS = Saving Disposable Income APS – percentage saved at one point in time APS = percentage of disposable income that is saved Disposable Income = after tax income
Marginal Propensity to Save MPS = Marginal Propensity to Save MPS = Change in Savings Change in Income MPS = measures changes in savings over time
Average Propensity All of your disposable income is either spent or saved. Therefore: APS + APC = 1.00
Marginal Propensity All of the change in your disposable income is either spent or saved. Therefore: MPS + MPC = 1.00
Autonomous Consumption Consumption when disposable income is zero Even when you have no job you still need to keep your car and cell phone running. Oh, and eat.
Induced Consumption Consumption that varies when your disposable income varies When your income rises, this part of consumption rises.
Autonomous and Induced Consumption Consumption = Autonomous + Induced Disposable income = Autonomous Consumption + Induced Consumption + Savings
Autonomous and Induced Consumption Pattern Thus the pattern is: FOR CONSUMPTION TO ALWAYS BE POSITIVE; TO START ABOVE INCOME LEVELS; TO RISE AS INCOME RISES; BUT TO RISE MORE SLOWLY THAN INCOME RISES.
Conspicuous Consumption is a person spending on essentially frivolus goods or services, with the sole purpose of showing off ones wealth
Determinants of Consumption 1) Disposable Income 2) Credit Availability 3) Stock of Liquid Assets 4) Stock of Durable goods 5) Keeping up with the Jones 6) Consumer Expectations 7) The Wealth Effect
Disposable Income Most important determinant of spending patterns! The higher your income – the more you spend.
Credit Availability Credit cards, car and home loans, etc. Generally, the more credit you have the more you spend. This is because your credit limits rise as your income rises.
Stock of Liquid Assets “Things” that can be turned into cash, like stocks and bonds. The more you have, the more you are likely to spend. This is because the higher your income, the more you save to spend later.
Stock of Durable Goods How much “stuff” you already own. If you already own a lot of furniture, cars, TV’s, then you probably won’t buy more of them.
Keeping up with the Jones Very important determinant of spending patterns! What is everybody else doing? More importantly, we want to spend like the rich, or the people on TV.
Consumer Expectations Consumer expectations = how people think about or feel about the near future. If people think positively about the future, they will spend more. If they think negatively about the future, they will spend less.
Wealth Effect Works largely through home ownership, but also linked to actual wealth. When people own real estate, and the value of their property goes up – they feel richer. And then they spend more.
Determinants of Consumption Notice how many of these are based on emotions. A lot more of our decisions to spend our irrational, or partly so, than we want to admit. Impulse buying anyone?
Created by: bellam08
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