Factors Affecting Consumption
Economics (Year 11) - Introduction to Macroeconomics
The consumption sector of aggregate expenditure refers to the spending level of households. It is known for being a reasonably stable component that usually constructs around 57% of the Australian economy. It is important to understand how macroeconomic factors can influence consumption to recognise its effects on household job security, future income, wealth and the capacity of consumers to borrow.
Level of Disposable Income (Yd)
Disposable Income can be defined as the income which remains after subtracting taxes, insurance, interest payments or other transfer payments. This income can be either spent or saved. However, during periods of intense economic activity were incomes and employment levels are high, households generally plan to spend more on consumption during these periods. The opposite is apparent for periods of low economic activity where unemployment rates are high and incomes begin to fall; during these periods spending levels drop and savings begin to grow. Statistics according to tradingeconomics.com show Australia's aggregate level of disposable income has averaged 99 660 million AUD since 1959 to 2021. It reached record heights in the third quarter of 2020, reaching 348 864 million AUD. Despite Australia entering a recession during this time, due to reduced interest rates and tax levels, Australians had more disposable income to spend or save.
Cost of Credit (interest rates)
The cost of interest rates and credit is controlled by the Reserve Bank of Australia who utilise their 'monetary' policy to alter the cash rate level in order to influence spending in the economy. If interest rates are lower, then there will be a positive effect on spending as the cost of loans takes a smaller 'chunk' of households consumer's disposable income. As these surplus funds saved from paying reduced taxes, the idea of spending this money appears more attractive as it is money they haven't 'earnt.' Rising interest rates will have the opposite effect as repayments on borrowed funds takes up a larger percentage of income, therefore, taking up a larger percentage of households disposable income.
Stock of Household Wealth
If households hold more stock, shares or property, typically they will feel more wealthy. As perhaps silly as this sounds, if the value of these assets are rising, although they do not hold the psychical monetary value of the asset, stocks or shares, consumers are more likely to spend more on durable goods are expensive purchases. If these assets are decreasing in value, the opposite effect will occur and expenditure on durable goods will decrease.
Consumers can have positive or negative feelings about the state of the economy which is shaped by past events. For example, COVID-19 resulted in low expectations throughout 2020 due to compromised stability of the economy. Consumers expectations greatly influence the level of durable goods and large purchases, because if confidence is low, consumers are less likely to feel secure in making large purchases. This is shown by the graph above from the 'Westpac Consumer Confidence Index,' it shows that during the period that Australia entered a recession in 2020 consumer confidences was at its lowest.
Fiscal Policy is a government concept that refers to a their ability to spend their revenue in ways that can positively influence the economy. Governments can raise revenue through taxes on both households on businesses; this money can then be redistributed in order to affect households level of disposable income. For instance, if spending is low, governments can reduce tax levels or increase their spending on infrastructure in order to create jobs and intron boost confidence and incomes which, in turn, will boost spending.