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Economics (Year 12) - Aggregate Expenditure Model

Christian Bien

What is Consumption?

Consumption is all household expenditure on durable goods, non-durable goods and services.

  • Durable Goods - Goods usually lasting for a period longer than 3 years, e.g whitegoods, personal motor vehicles

  • Non-Durable Goods - Goods usually lasting for a short period time, usually within 3 years - e.g food, mobile phones, clothing

  • Services - Payment for completion of a task - e.g Lawn mowing services, home maintenance, childcare

What are the Factors of Consumption?

The factors of consumption are an abbreviation known as WREPCY.

  • Stock of Wealth - the value of a household's assets, such as property, shares and other investments. If the value of these assets rise, then households feel richer and will spend more

  • Interest Rate - the market interest rate on financial products influenced by changes in the cash rate

  • Consumer Expectations - household expectations about current and future job security. If households are confident about job security in the current and future economic conditions, they will increase the expenditure as it reduces the need for saving in case of unemployment.

  • Government Policy - a policy that directly and indirectly affects the ability of households to spend and save. For example, an increase in taxation rates will decrease consumption as households have less to spend.

  • Accessibility to Credit - Barriers in accessing credit are often set by the Australian Prudential Regulation Authority (APRA)

  • Disposable Income (In economics income is represented by a Y) - The main factor, to which the level of income of households determines their ability to spend.

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