Determinants of Agg Expenditure Flashcards
what are the 5 factors affecting consumption spending (LSCCG)
- level of disposable income
- stock of household wealth
- cost of credit
- consumer expectations
- government policies
(factors affecting consumption spending) explain level of disposable income and how it affects consumption spenidng
households spend more on consumption when they have higher levels of income
(factors affecting consumption spending) explain cost of credit if there are LOWER interest rates
lower interest rates = pos effects on agg consumption
when interest repayments fall, a smaller slice of income is taken out and the op cost of exp falls so saving is less attractive because they will recieve lower interest on the saved funds
(factors affecting consumption spending) explain cost of credit if there are HIGHER interest rates
higher interest rates = neg effects on agg expenditure
repayments take up a larger proportion of income therefore op cost of consumption is higher as households forego the higher return from ‘saving’ surplus cash with banks
(factors affecting consumption spending) explain stock of household wealth and how it affects consumption spenidng when it is value high and when value is low
households that hold property/shares feel more wealthy when value of assets rises and therefore are more liekly to spend on durables
households delay major consumption decisions or reduce discretionary spending
(factors affecting consumption spending) explain consumer expectations and how it affects consumption spenidng
expectations are shaped by economic events (news, interest rates. effects discretionary luxuries not basic commodities
(factors affecting consumption spending) explain government policies and how it affects consumption spenidng
gov has the power to get revenue through tax and spend those taxes which affects households
monetary policy affects cost of credit
(investment expenditure) what is private investment and why is it so volatile
priv investment = expenditure on producer and capital goods that are used to produce final goods and services in the future.
(investment expenditure)why is it so volatile
priv investment has swung between 16% and 23% of GDP in the last 50 years due to risk of failure. political decisions, international events and changes in consumer taste influence risk and so investment rises and falls according to perceived risk
(investment expenditure) what are the 4 factors affecting investment expenditure (RGBP)
- Rate of Interest
- Government Policy
- Business Expectations
- Profitability
(investment expenditure - rates of interest) explain why there is an inverse relationships between rate of interest and ivnestment expenditure
the higher the interest rates the less investment expenditure. when interest rates are higher capital purchased with borrowed funds is worth more
(investment expenditure - rates of interest) explain the opportunity cost of interest rates using an example
interest rates involves the op cost of money over investment. when interest rates are high, firms forego other investment
eg if IR on borrowed funds is 12%, rate of return from capital investment should be >12% to be wise
(investment expenditure - rates of interest) what is the difference between nominal and real rates of interest (explain an example)
nominal - current price of borrowed money
real - takes the rate of inflation into account
if nominal interest rate is 8% and inflation is 4% the real rate of interest is 4% (8-4)
(investment expenditure - business expectation) explain what positive and negative business expectatons are
pos - future sales/ profit and investment will increase
neg - reduction in planned investment
(investment expenditure - profitability) explain hwo profatibility can influence investment expenditure
firms retain a proportion of profit that they can then invest to purchase land and expand. if profatibility is low equipment can be run down
(investment expenditure - profitability) explain how the technological process is emodied in capital items
firms invest to take advantage of lower costs of production that the equipment can offer. investment is more efficient and can lower production cost
(investment expenditure - government policy) explain how fiscal and monetary policies affect investment expenditure
they affect business costs (tax) and the general level of economic activity
(investment expenditure - government policy) explain how some gov policies can have direct impacts on ivestment
- the gov could offer inventives for businesses to invest (subsidies, taxes allowance, overseas trade promo) in a period of low economic activity
- gov regulation can affect market structure, competition, availibility of funds for investment and teh cost of doing business
(investment expenditure - government policy) explain how the government itself has invested
the government has invested in infrastructure that benefit the future (schools, roads etc).
they often partner with private firms to develop such profitable utilities capable of funding themselves
(government expenditure) explain why gvoernment expenditure is farily stable giving an example of its stable investments
it is shaped by non economic factors (social + political)
gov programs in health, education, welare
(government expenditure) explain when gov expenditure is unstable with an example
if welfare payments increase when economy is in trough because cyclical unemployment increases - the gov has to change tax/exp to manage this
for example the gov would decrease investment subsides if the economy was booming
(imports and exports) explain why import/export exp is so volatile
because AUs has high intesity of trade and is a ‘small open economy’
(imports and exports) explain 2 influences on exports with a real life example of each
- economic conditions in Aus and the world affect commodity demand (aus mineral high in demand as india/china urbanise)
- domestic agricultural production rises and falls due to seasons (eg drought)
(imports and exports) explain 3 influences on imports with a real life example of each
- domestic levels of econ activity influence Aussie inclination to import
- imports seem elastic to GDP (if gdp rises by 5%, imports rise by 10%)
- in period of high econ activity, consumers import gods which can’t be sourced locally and buy equipment not available domestically
