Spending, Saving & Borrowing (Cambridge (CIE) IGCSE Economics): Revision Note

Disposable income is the money that households have left over from their salary/wages after they have paid their taxes and have received any transfer payments/benefits from the government

Consumption increases as disposable income increases and decreases as disposable income decreases

Interest rates are set by the government's Central Bank

Changes to the base rate cause commercial banks to change the lending rates they offer customers

If interest rates increase then the cost of borrowing increases. Higher borrowing costs = less consumption

If interest rates increase, the monthly repayment on any existing loan increases. Higher loan repayments = less consumption

The stronger the economy, the higher consumer confidence. Consumers feel secure in their jobs and are confident of receiving regular salary payments. Therefore consumption increases

In a weakening or recessionary economy, consumer confidence falls. Consumers feel less secure in their jobs and consumption decreases 

When disposable income increases, the proportion saved depends on the overall income level of the household

Low income households will spend any additional income on necessities or a few basic luxuries - little additional saving occurs

Medium income households will increase both consumption and savings

High income households will usually increase their savings (or asset purchases) significantly

Changes to the base rate cause commercial banks to change the savings rate they offer customers

An increase in the savings rate offered by commercial banks incentivises households to save more

An decrease in the savings rate offered by commercial banks disincentivises households from saving and encourages consumption

Households tend to save when they are more fearful of the future

The stronger the economy, the higher the consumer confidence and the lower the level of household saving

The weaker the economy, the lower the consumer confidence and the higher the level of household saving

When disposable income increases, household borrowing often increases due to the ability to make additional monthly payments

Low income households find it difficult to access commercial bank loans and if they need to borrow money, they face higher interest rate charges (e.g. payday loans or "buy now, pay later" schemes) - or they turn to money lenders

Medium income households will increase borrowing as income rises

High income households often receive preferential interest rates and obtain large loans to fund asset purchases e.g. luxury properties

If interest rates decrease, medium and high income households may decide to borrow more money from commercial banks, as it is now cheaper to repay

There will likely be an increase in personal loans to fund travel, car purchases and home improvements

Low income households are usually unable to access borrowing from commercial banks, even when interest rates fall and continue to borrow from sources that charge high interest rates

When the economy is booming, confidence is high resulting in more borrowing and consumption

When the economy slows down or stagnates, confidence falls resulting in less borrowing and consumption