<3.2 HOUSEHOLDS> 

• DISPOSABLE INCOME LEVEL: The main influence on the amount spent by a person or household is DISPOSABLE INCOME (Which is defined as the amount of money that a person or family has left after paying their taxes.) As income rises, people usually spend more in total, but less as a percentage of their income.

• WEALTH LEVEL: The wealthier the individual the more likely they are to have access to money to spend. BUT WHY?

  • • WEALTH means you are likely to OWN SHARES which can increase in value as well as generate dividends

    • WEALTH means you are more likely to OWN MANY ASSETS which can be cashed in by, for example, withdrawing money from a bank account or selling a car, and then spent. 

    • WEALTH means you have MORE COLLATERAL TO SECURE LOANS, hence the banks will be more wiling to lend to you, for SPENDING.

• CONFIDENCE LEVEL is an important influence on consumption. If people feel more optimistic about their future career prospects and income, they are likely to spend more. In contrast, if they become pessimistic about economic prospects they will tend to spend less. 

• THE RATE OF INTEREST refers to the REWARD FOR SAVING as well as the COST OF BORROWING. 

  • • • • For SAVERS/LENDERS (Who tend to be wealthier people) WHEN THE RATE RISES, they have the option to SAVE EVEN MORE or SPEND the extra gain. 

        • For EXISTING BORROWERS (Who tend to be the less wealthy) WHEN THE RATE RISES they will have to make larger repayments and so will have lower disposable incomes to spend AND WILL SPEND LESS.

        • For POTENTIAL NEW BORROWERS they will be discouraged from BORROWING/TAKING OUT LOANS as the cost has now risen meaning LESS SPENDING 'ON CREDIT'.

        • Overall a RISE IN RATES will see an overall FALL IN SPENDING and vice versa.

• THE AVERAGE PROPENSITY TO CONSUME (APC) refers to THE PROPORTION OF DISPOSABLE INCOME WHICH PEOPLE SPEND.

APC = (CONSUMPTION ($) / DISPOSABLE INCOME ($))

• Sketch the diagram below then explain the patterns you see to the left, right and at the intersection. (I have done the left side for you 😉)

• "To the left of the Intersection we can observe that when income is less than the consumption line, individuals are dissaving, meaning they are spending more than their income. This may involve borrowing or using past savings, this means their APC is greater than one"

• Study the two pie charts below that contrast the normal spending patterns between low income households (Can also be applied to low GDP per capita countries) and high income households (Can also be applied to high GDP per capita countries). 

• Then COPY the statement below and STATE TWO FURTHER STATEMENTS about what you notice.

• "We can see that low income households spend more as a percentage of their total income (%) on food than high income households, however high income households spend more in monetary terms ($) on food reflecting their likely ability to buy better quality and more variety of food."

• CONTRACTUAL SAVING (MANDATORY):- Some forms of saving are contractual, meaning that IF YOU SIGN A WORK CONTRACT A CERTAIN % OF YOUR INCOME IS DEDUCTED BEFORE YOU RECEIVE IT. How is this saving? Some of this money is USED TO FUND YOUR STATE PENSION which you receive when you reach 66-67 yrs old. So in effect you are FORCED TO SAVE. The main forms of contractual saving are insurance policies and pension schemes. Examples include: NATIONAL INSURANCE UK, MANDATORY PROVIDENT FUND HK (MPF), CENTRAL PROVIDENT FUND, SINGAPORE (CPF)

• NON-CONTRACTURAL SAVING (OPTIONAL):- Non-contractual saving includes placing money in BANK ACCOUNTS, buying GOVERNMENT BONDS, SHARES and PROPERTY. 

• Go to HERE, and find how much will be deducted from your monthly earnings for national insurance purposes, if you are 'under 21', and earn £500 per month. You can also use this CALCULATOR.

• SAVE FOR YOUR RETIREMENT as you will find it hard to get work and earn a salary when you are old. 

• SAVE FOR YOUR CHILDREN'S FUTURE, this of often focused on saving the money needed to send the children to University, though it can just be mean to make sure there is enough inheritance to pass on to your family.

• SAVING AS A PRECAUTIONARY MEASURE, given that the future is unknown some people are saving in case there are any emergencies or unexpected problems. 

• SAVINGS AS A MEANS TO EARN FURTHER INCOME, as savings earn interest which can be substantial and provide further income.

"There are many reasons to save but will/can you?"

1) Must have some DISPOSBLE INCOME to start with

2) The rate of interest needs to RISE to temp me to save, 

3) The government must keep their hands of any gains I make. 

4) There must be a range of quality financial institutions to save at.

5) You must be confident in the ability of institutions to pay an interest and repay the amount saved, no curruption.

• THE AVERAGE PROPENSITY TO SAVE (APS) refers to THE PROPORTION OF DISPOSABLE INCOME WHICH PEOPLE SAVE.

 APS = (SAVING ($) / DISPOSABLE INCOME ($)) 

• Annotate the diagram you sketched above for the APC and add the values for the APS to the left, right and at the intersection. What do you notice?

• Can you think of 'THREE OTHER REASONS' why households would wish to BORROW MONEY?

• POORER HOUSEHOLDS: Clearly the poor are less likely to have savings and would be more inclined to require financial help much more than the rich would. However BANKS are likely to be more RELUCTANT TO LEND to them as they LACK COLLATEROL, and if they do lend the HIGH RISK FACTOR will be mean they are charged a HIGH INTEREST RATE.

• Note that the opposite is true for RICHER HOUSEHOLDS.

• Copy the above statement for a RICHER HOUSEHOLD.

Look at the two diagrams below, can you explain the pattern you see.

The influences affecting the amount of money people borrow include:

• THE AVAILABILITY OF LOANS. The easier it is to borrow, the more likely people are to borrow.

• THE RATE OF INTEREST. A rise in the rate of interest will increase the cost of borrowing, which is likely to reduce borrowing.

• THE CONFIDENCE LEVEL. The more confident people are about the future, the more they will anticipate earning in the future. They may adjust their spending patterns now, financing some of their extra expenses by borrowing with an expectation that their higher income will enable them to repay their loans.

• ETC....

• Discuss whether the poor are more likely to borrow than the rich.

• Discuss whether a government should encourage an increase in saving.

• Discuss whether the rich always save more than the poor.

• Discuss whether the rich in one country will save more than the rich in another country. 

• Analyse how the spending, saving and borrowing patterns of young workers may differ from older workers.

• Analyze the impact of a cut in interest rates on saving and investment. 

• Explain two reasons why household borrowing may increase.

• Explain the difference between saving and borrowing.

• Explain two reasons where a commercial bank may prefer to lend to the rich rather than the poor.