SPENDING

• Spending is the total money spent on final goods and services by

individuals and households for personal use and enjoyment in an
economy.
• People spend in order to buy goods and services and to maintain a
given standard of living. People mostly spend on foods, clothing,
housing, bills, utilities, transport, entertainment, education etc.
INFLUENCES ON SPENDING
• There are several factors that affect the spending habit of an
individual. They are:
1. Disposable income
2. Wealth
3. Confidence
4. Rate of interest
5. Distribution of income
6. Advancement in technology
DISPOSABLE INCOME
• Disposable income is the income left after tax has been deducted.
This is the main influence on the amount of money spent by a person.
As disposable income rises, people tend to spend more. But the
percentage of spending decreases with the increase of income.
WEALTH
• Wealth is a stock of assets including money held in bank accounts,
shares in companies, government bonds, cars and property. Wealth is
related to expenditure in 4 ways.
1. Wealth (in the form of shares and stocks) generates income. For
example the dividends received from the shares is a type of income
which can be spent.
2. Wealth can be cashed in. For example, by withdrawing money from
a savings account in bank, selling a property (which is also a form of
wealth)
WEALTH
3. People use their wealth as security for loans. When people take loan
from banks, they have to provide documents against the loan. People
can provide documents of their property (wealth) in order to finance
the loan.
4. Confidence refers to the fact that how much a person is confident about
their future income. If they are optimistic about future incomes, then
they will spend more in the present. However, if they are not confident
that their income will be stable or increase in the long run, they will
tend to spend less in the present.
• Interest rate plays a crucial role here. If interest rate rises, it will make
borrowing expensive but will also encourage savings.
DISTRIBUTION OF INCOME
• The income distribution is the smoothness or equality with which
income is dealt out among members of a society.
• If everyone earns exactly the same amount of money, then the
income distribution is perfectly equal. If no one earns any money
except for one person, who earns all of the money, then the income
distribution is perfectly unequal. Usually, however, a society's income
distribution falls somewhere in the middle between equal and
unequal.
ADVANCEMENT IN TECHNOLOGY
• Advancement in technology may also increase expenditure. With the
invent of new technology, people tend to replace their old ones with
the new products, hence increasing the expense.
INCOME AND CONSUMPTION
• People either saves or spend their entire disposable income. When a
person is very poor, he/she tends to spend of all of the disposable
income because they cannot afford to save.
• When income rises, the tendency to spend increases. However, the
total percentage of spending remains low than of those whose
disposable income is low.
• For example, a person having a disposable income of $10,000 has a
lot to spend in comparison to the person whose disposable income is
just $100. Because for someone who has a disposable income of
$10,000 is unlikely to spend all the income on spending.
INCOME AND CONSUMPTION
• The proportion of income that people tend to consume is often
referred to as average propensity to consume (APC). It is calculated by
dividing consumption by disposable income.
• The relationship between consumption, disposable income and APC is
shown in the table below:
A graphical representation of the disposable income and consumption is as below:
SAVINGS
• Saving, process of setting aside a portion of current income for future use,
or the flow of resources accumulated in this way over a given period of time.
Saving may take the form of increases in bank deposits, purchases of
securities, or increased cash holdings.
• There are many forms savings.
1. Contractual: This means that people sign a contract, agreeing to save a
certain amount on a regular basis. The main forms contractual saving are
insurance policies and pension schemes.
2. Non- contractual: Such types of savings include placing money in bank and
building society accounts, buying govt. securities, shares and properties.
SAVINGS
• There are several factors that influence the savings of a person. They
are:
1. Income
2. Wealth
3. Rate of interest
4. The tax treatment of savings
5. The range and quality of financial institutions
6. Age structure
7. Social attitudes
INCOME AND SAVINGS
• Saving is the part of the disposable income that is not spent.
However, we cannot save below a certain income level. As disposable
income rises, so does the proportion of savings from that disposable
income increases. This proportion is referred to as average propensity
to save (APS). It is calculated by dividing savings by disposable
income.
• The relationship between savings, disposable income and APS is
shown in the table below:
Disposable Income ($) Consumption ($) Savings ($) APS
100 120 -20 -0.2
200 200 0 0.0
300 270 30 0.1
400 320 80 0.2
A graphical representation of the disposable income and savings is as below:
BORROWING
• Borrowing is the transfer of a part of the income from a person who
doesn’t want or have any need to spend it to a person who needs the
money for any purpose. People borrow for a number of reasons;
some borrows to maintain a standard of living, some due to meet an
urgent need, some borrows to buy a car or house or to spend on a
holiday etc.
• Mortgage: Most people have to borrow money to finance their
purchase. This type of loan is called a mortgage.
BORROWING
• Several factors affect the borrowing of an individual. These are:
1. The availability of loans and overdrafts: The easier it is to borrow,
the more likely people are to borrow.
2. The rate of interest: A rise in the interest rate will increase the cost
of borrowing (people will have to pay more interest against their
loans), which will decrease the borrowing.
3. Confidence: If people are confidence about their future earnings,
then they will tend to borrow in the present time.
4. Social Attitudes: In some countries people find it riskier/ less riskier
to borrow than in other countries.