Causes of Consumer Spending

Readers Question: What influences our consumption?

Consumption is financed primarily out of our income. Therefore real wages will be an important determinant. There is usually a strong correlation between economic growth / and consumer spending. Other factors include:

  • Interest Rates – Interest Rates influence cost of borrowing and mortgage interest payments. – Higher interest rates increase cost of spending on mortgages. Therefore higher rates will lead to lower spending as consumers have lower disposable income.
  • House prices – Housing is the biggest form of wealth. When house prices are rising people are more confident to spend they can also re mortgage their houses.
  • Consumer Confidence. Higher confidence will encourage people to spend more.
  • Difficulty / ease of borrowing money. e.g. after the credit crunch it was more difficult to borrow from banks leading to lower consumer spending.
  • Tax rates – A cut in income tax would give consumers more disposable income

Autonomous Consumption. In Keynesian models it is argued that even with zero income, people will still consume a certain amount (to buy food to live). This consumption may be financed by borrowing

See: Keynesian Consumption Function

see also: Causes of economic growth

Readers Question: Why have businesses left it to the consumer to carry the nation recently?

I presume you are talking about US economy. I don’t think businesses have made a conscious decision to ‘leave it to the consumer’. What has happened in the US is that growth has been primarily consumer led. There have been various factors which have encouraged the consumer sector such as:

  • Low Interest rates
  • rising House prices
  • High Consumer confidence
  • Willingness to borrow.

By contrast, exporting businesses have found international markets increasingly competitive.

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