Chapter 17

Households
Learning objectives:
• Discuss the influences on the spending of households
• Discuss the influences on the saving of households
• Discuss the influences on the borrowing of households
Some households spend large sums of money,
While others spend a small amount each week.

Some households also save large sums of money

each week. Others do not save anything some weeks.

The amount that households and their members borrow also

varies.

Why do you think there are these differences?

 17.1 Spending
People spend in order to buy goods and services and to maintain a
given standard of living.

What are the main item items

people spend for?
17.1 Spending
 17.1 Spending
Influences on spending:
wealth
• Generates income
• Can be cashed in
• Security for loans
• Increase confidence
 Chapter17.1 Spending
Main items involving expenditure:
food, clothing and footwear, housing, gas,
electricity, water, consumer durables,
transport, entertainment, and leisure
goods and services.
Influences on spending:
Disposable income: Higher income enable
person to spend more. But percentage
spent becomes less as income rises.
Wealth: It has link to expenditure in four
ways.
a) it generates income.
b) It can be cashed in.
c) It can be used as a security for loans.
d) It affects confidence.
Confidence: If people feel more
optimistic about their future career
prospects and income, they are likely to
spend more.
Rate of interest: Expenditure may fall if
the rate of interest rises.
Distribution of income: a more even
distribution of income and transfer of
income from the rich to the poor, is
likely to increase expenditure in a
country.
Advances in technology: may increase
expenditure since people will replace
old items with new.
 Income and wealth
Is this enough to save? If income is low

survival
• In fact, some may have to spend more of their income in
order to be able to buy enough food, clothing and pay for
housing.
DISSAVING
• This is because they are either drawing on their past
savings or, more likely, borrowing other people’s savings.
 Income and wealth

When income is MVR 1,000 When income is MVR

200,000

Spend Spend Save

This proportion is know as APC

= consumption / disposable income
 Income and wealth
Consumption
Y

A B
0 Z Disposable
income
DISSAVING?
 Income and wealth
People can either spend or save their The proportion of income which
disposable income. When people are people spend is sometimes are
very poor, they cannot afford to save. referred to as the average propensity
All of their disposable income will be to consumer (APC).
spent on buying basic necessities to It is calculated by:
survive.
In fact, some may have to spend
more of their income in order to be
able to buy enough food, clothing and
pay for housing. When people spend
more than their income, they are said
to be dissaving. This is because they
are either drawing on their past
savings or, more likely, borrowing
other people’s savings. Figure shows that at very low levels
As income rises people are able to of income, there is dissaving. At Z
both spend and save more. As people level of income, all income is spent.
become richer they buy more and Then as income rises past Y, saving
better quality products. However, occurs. Over the complete range of
whilst the total amount spent rises income, expenditure continues to rise
with income, the proportion spent but it rises at a slower rate.
tends to fall.
 Pattern of expenditure

POOR 100%
✖
When income is MVR 1,000

Eat more
Wear more
Spend

The rich are likely to spend more in total on food, as they tend to
buy a greater variety and higher quality of food, and more on
clothes, as they buy more clothes and clothes of a higher quality.

The amount they spend is, however, usually a smaller proportion of their
income and total expenditure.
 Pattern of expenditure
• The rich spend more, both in total and as a proportion,
on luxury items, consumer durables, entertainment and
services.
• This difference in spending pattern also occurs between
countries. The rich countries and poor countries.
• Spending patterns vary within income groups in a
country, according to differences in household
composition, tastes and age.
• Household with children has different spending than
without. Some households may spend based on their
cultural values. Some households may spend based on
medical care. The retired may spend higher proportion on
heating. People in their late teens spend higher proportion
on clothing and entertainment.
 Contractual: sign a contract, save
17.2 Saving an agreed amount regularly

Which ones are

• Contractual?
• Non-contractual?
Reasons for saving
Influences on
saving
Group activity. (7 mins)
1. In groups, discuss about the influences provided
as a table.
2. Decide what will happen to saving (increase /
decrease) based on the case given.
Influences on saving
INCOME
Influences on saving: Income

 £515,000 a week.
MVR 9,222,259.50 a week.

 £400,000 a week.
MVR 7,162,920 a week.
Influences on saving

WEALTH
Influences on saving: wealth

50 Richest People in each US state.

Influences on saving
INTEREST
RATES
Influences on saving: Interest rate on saving

Saved MVR 10,000.

6% 10%
Interest = MVR 600 Interest = MVR 1000
Total in account = MVR 10600 Total in account = MVR 11000
 Influences on saving
RANGE AND QUALITY OF
FINANCIAL INSTITUTIONS
Influences on saving: range and quality of financial institutions

saving
opportunities
in Maldives.
Influences on saving

AGE STRUCTURE
Influences on saving: Age structure
Influences on saving

SOCIAL ATTITUDES
Influences on saving: Social attitudes
 Influences on saving
• Income
• Wealth
• The rate of interest
• Tax on savings
• The range and quality of financial institutions
• Age structure
• Social attitudes

• APS (Average propensity to save)

Borrowing
17.3 Borrowing
17.3 Borrowing
Influences on borrowing

Banks who
offer loans
Influences on borrowing
Influences on borrowing
Influences on borrowing
Influence on borrowing
• The influences affecting the amount of money
people borrow include:
• The availability of loans and overdrafts.
• The rate of interest
• Confidence
• Social attitudes
Multiple choice questions
1. Interest rates rise. How is this likely to affect
household savings and expenditure?
saving Expenditure
A. rise rise
B. rise fall
C. fall fall
D. fall rise
Multiple choice questions
2. What is most likely to cause a rise in
expenditure in an economy
A. A rise in confidence
B. A rise in income tax
C. A reduction in wealth
D. A more uneven distribution of income
Multiple choice questions
3. What can cause a fall in saving?
A. A rise in the range of financial institutions
B. A fall in the rate of interest
C. A rise in disposable income
D. A fall in the rate of tax imposed on earnings from
saving.
Multiple choice questions
4. What must be occurring, if consumption is
less than disposable income?
A. Borrowing
B. Income levels are falling
C. Income is being redistributed to the poor
D. saving
Multiple choice questions
5. What might cause consumers in a high-income
economy to both save more and spend more?
A an increase in the rate of interest
B an increase in wealth
C expectation that prices will fall in the future
D inflation rising at a faster rate than wages
Multiple choice questions
6. Average incomes rose by 5% but savings did not
rise. What might explain this?
A Consumer confidence in the economy fell.
B Incomes rose more slowly than the rate of
inflation.
C Interest rates for savings rose.
D The rate of income tax was reduced.
Multiple choice questions
7. Which combination of influences would increase
the level of borrowing by a household?
Multiple choice questions
8. What would most likely cause a person to increase
their savings?
A a decision to plan for retirement
B a fall in income
C a fall in interest rates
D a reduction in tax-free saving schemes
Multiple choice questions
9. The table shows how household spending changes
with income.

What is the lowest level of income at which savings

are positive?
A $3000 B $3600 C $3900 D $4200
Multiple choice questions
10. What can a central bank increase in order to
reduce consumer borrowing?
A commercial bank deposits
B government spending
C the exchange rate
D the rate of interest
Multiple choice questions
11. What is the most important factor that affects
how much a family saves?
A the income of the family
B the level of taxation
C the rate of inflation
D the reliability of banks
Multiple choice questions
12. The table shows how three people (X, Y and Z) spend their
income.

For these three people, what is the most likely order of income, from
highest income to lowest income?
• A X → Y→ Z
• BY→Z→X
• CZ→X→Y
• DZ→Y→X
Multiple choice questions
13. The table shows the percentage (%) of income saved by
different age groups.

What can be concluded from the table?

A Over the age range shown total savings equalled total
dissavings.
B The 15–29 age group has the lowest level of income.
C The 50–64 age group saves the highest percentage of its
income.
D The 65+ age group has a lower income than the 30–39 age
group.