CONSUMERS’ SPENDING, SAVINGS & BORROWING

* TYPES OF PERSONAL INCOME

There are several ways of measuring personal income:

1. Gross personal income: This is the total personal income from all sources of an individual.
2. Disposable personal income: This is the amount which remains after income tax and national insurance contributions have been deducted from gross personal income. Disposable personal income = Gross personal income – Income Tax & NI contribution.
3. Real disposable personal income: This refers to the quantity of goods & services which disposable income can buy. It is the purchasing power of money income.

* WHY DO PEOPLE SAVE?

People save money because:                   

1. It is good social attitude.
2. It is helpful for future.
3. For any particular objective.
4. For security purpose.

5. Of increasing disposable income.
6. High rate of interest attract to save more.
7. They are attracted by different saving schemes.

* FACTORS INFLUENCE CONSUMER SPENDING

1. Increase in real income ( more real income more spending )
2. Amount of wealth held ( more wealth held more spending )
3. Easy borrowing ( easy borrowing, easy spending )
4. Hire-purchase facilities ( easy installments, more spending )
5. Rate of interest ( low rate of interest more spending )
6. Changes in the rate of income tax ( decrease rate of interest, more spending)
7. Changes in the distribution of income ( lower income household spend a greater proportion of their income then higher income households )

* EFFECT OF CHANGES OF INTEREST RATE

Changes in interest rate may have a number of effect.

A rise in the rate of interest may:

1. Increase savings
2. Discourage spending
3. Reduce investment.
4. Raise firms’ cost of production.
5. Raise the exchange rate.
6. Discourage  borrowing.

A fall in the rate of interest may:

1. Decrease savings.
2. Encourage spending.
3. Increase investment.
4. Decrease the exchange rate.
5. encourage borrowing.

*HOW & WHY DIFFERENT INCOME GROUPS HAVE DIFFERENT EXPENDITURE PATTERN:

People spend more as their income increases; they also tend to save a large

percentage of their income. When incomes are very low, there will be no savings- the whole of the disposable income will be required to buy the basic necessities of life. As income increases, however, and the most urgent needs can easily be satisfied, it becomes possible to spend more & save more. When incomes  increase in developed countries, much of the extra spending goes on durable consumer goods(e.g. cars, videos) and on a variety of services (e.g. holidays abroad).

*How does the pattern of  spending change as living standard improve?

Pattern of spending changes  mainly due to the increase of real incomes.

Food :                   As real incomes rise, people tend to buy a greater variety of better quality foodstuffs but share of income spent on food tends to fall.

Transport & vehicle :  The rise in real incomes induce growth of private transport & vehicles.

Housing:                The rise in real incomes increases home ownership, better housing facilities.

Durable household goods : As real incomes rise, people possess more and more durable consumer goods like air condition, T.V., fridge, mobile phones etc.

Services :              As real incomes rise, people spend more on holiday, air travel, catering services etc.