Transcript Factors of Consumption

To consume most goods and services is
to eat them up, burn them, wear
them out, see them break or rust out
or crack or tumble down, according
to Mason Gaffney insights in his
column in Groundswell.
is the value of goods and services bought by
people. Individual buying acts are aggregated
over time and space.
Composition:
1. Consumption may be divided according to
the durability of the purchased objects.
 durable goods (as cars and television sets)
 non-durable goods (as food)
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2. Consumption is divided according to the needs it
satisfies.
10 chapters of expenditure:
(1) food
(2) clothing and foot wear
(3) housing
(4) heating and energy
(5) health
(6) transport
(7) house furniture and appliances
(8) communication
(9) culture and schooling
(10) entertainment
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refers to the part of person’s income which is
not spent on consumption. It therefore
involves a sacrifice because consumption has
to be given up for one to save.
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Consumption is the act of using goods and
services to satisfy human wants (Pagoso et
al., 2009).
To consume most goods and services means
eating them up, cooking them, wearing them
out, seeing them break, rust out, crack, or
tumble down. (Gaffney, 2005).
Consumption or even purchase goods and
services, entails an income in order to be
done.
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Autonomous consumption
 represents consumption when income is zero
 Independent of income meaning the amount of
consumed good doesn’t vary with changes in
income.
 It depends on borrowing or using up of savings
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Induced Consumption
 the concept that the increase in personal
consumer spending (consumption) that occurs
with an increase in disposable income (income
after taxes and transfers)
 Such consumption considered induced by income
when expenditure on these consumables varies as
income changes.
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Focuses on induced consumption as it is the
component that is affected by income.
Consumption function quantifies induced
consumption through Marginal Propensity to
Consume or MPC
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Quantifies the part of income which is consumed
For example, if a household earns one extra dollar of
disposable income, and the marginal propensity to
consume is 0.65, then of that dollar, the household
will spend 65 cents and save 35 cents.
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MPC is the derivative of consumption,
represented by C, in respect to disposable
income which is represented by Y
MPC is equal to ΔC / ΔY, where ΔC is change
in consumption, and ΔY is change in income
Income
Consumption
100
50
200
100
300
150
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Based on the given data MPC can be
computed as:
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MPC= ΔC / ΔY
▪ =100-50/200-100
▪ =0.5
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Computation of MPC entails the Multiplier Concept
which is the process of generating income through
the circular flow exchange between the households
and the firms (Pagoso et at., 2006).
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Suppose a large corporation decides to build a
factory in a small town and that spending on the
factory for the first year is Php5 million. That Php5
million as the initial investment will go to
electricians, engineers and other various people
building the factory.
Assuming that MPC is equal to 0.8 and the initial
investment equal to P5 Million, the consumption
therefore is equal to Php4 million
 In another, assume that Php4 million will in turn be
spent by various business and individual who
receives that amount and using the MPC equivalent
to 0.8. With the given data, the consumption can be
computed as 4,000,000 x 0.8 = Php3.2 million.
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Therefore, the multiplier can be calculated as:
Multiplier = 1 / (1 – MPC) = 1 / (1 – 0.8) = 1 / 0.2 = 5
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This means that the flow will go on 5 times.
Small changes in investment or government
spending can create much larger changes in total
output.
 Positive in macroeconomic policy, it can effect
substantial improvements with relatively small
amounts of autonomous expenditures.
 While the negative aspect is that a small decline in
business investment can trigger a larger decline in
business activity and, thereby, create instability.
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With MPC assumed as positive:
 as income increases, consumption increases, but
not by as much as the increase in income.
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Consumption and savings has inverse
relationship which means as consumption
increases savings decreases and vice versa.s
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Taste and preference
Population
Income
Price Level (Prices of Related Goods)
Innovation and Promotion
Number of buyers
Traditions
Expectations about Future Prices, Income
and Availability of Supply.
Other Factors
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depends on the product that satisfies one’s
desires and wants
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A change in collective attitude can change
influence taste or preference, consumption,
and marginal propensity to consume
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Duesenberry’s Relative Income Hypothesis
 difference in consumption behavior could be
explained by the difference in income level
relative to what one is accustomed to
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EXAMPLE
 family residing in a rural area may consume less
using their income compared with a family of the
same income level in a highly urbanized place like
Metro Manila.
That is because the rural family is accustomed to
lower standards of living while the urban family
follows otherwise.
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Taste and preference also differ across
different racial, ethnic, age, and occupational
groups
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Values have something to do with attitudes
and therefore, affect taste or preference
 Gaya-gaya system
 Colonial Mentality
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Population size also determines consumption
needs and, therefore, affects consumption
expenditures with a given income
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An increase in household size with income
and other factors as constant may decrease
the propensity to consume and increase
savings at the expense of non-essential items
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The level of income can increase with more
infusions in the circular flow
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Propensity to consume varies across
consuming units to which income is
distributed because of the varying influence
of demand factors.
 Households (lower income brackets) = dissave
 Households (higher income bracket) = save and
consume
As your income increases, your demand
increases for higher quality of goods will also
tend to increase markedly.
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A change in the general price level can spur
further consumer’s reaction through a shift in
the individual demand curves which changes
aggregate consumption expenditure.
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The price of goods is important, but prices of
related products also influence demand.
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Substitute goods
 goods that consumers buy as replacements of the
goods whose prices have gone high.
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Complementary goods
 goods that are consumed together.
 Example
▪ DVD Players and DVDs, Pandesal and Coffee
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expands the line of consumer’s choice and
extend the influence of demand factors on
consumption and propensity to consume
income.
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The introduction of new products can create
a demand and increase aggregate
consumption.
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Promotions and advertising serve as a medium
of introducing new products in the market which
create demand and consumption.
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They also give more information about existing
products to guide consumers in attaining a
better mix of items. More advertising can
change this mix and influence consumption
expenditure from the same income.
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An increase in the number of consumers in a
market will increase demand. Fewer
consumers will decrease demand.
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The influence of traditions on consumer’s
demand is significantly observed during the
celebration of special occasions such as
Christmas, Valentine’s Day, All Saints’ Day
and others.
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Example
 Christmas season = more people will purchase and
consume fiesta ham.
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Consumers who expect a shortage or sharp price
increases in the coming weeks or months may rush
out and buy storable goods now, thus, increasing
current demands.
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The uncertainties brought about by the “Gulf Crisis” in
1990 resulted into “panic buying” among many
Filipino consumers. This created shortages and drove
prices up. Panic buying adversely affects the market
and the economy as a whole because it creates
artificial shortages which in turn cause an increase in
the prices of commodities.
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General lifestyles
A standard level of consumption the family tries to
maintain over time.
Decisions regarding active saving strategies, like an
investment scheme for pension aims.
The relative success of past investment in shares or other
financial instruments; in fact, a stock-exchange boom is
likely to promote a euphoria tide with growing
consumption.
Opportunities of consumer credit, depending in turn by
interest rates and marketing strategies by banks and
special consumer credit institution.
Past decisions on durables
Status symbols diffusion - "social musts"
Before, understanding
“Recession”,
we need to understand the
market
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Demand
 to how much (quantity) of a product or service is
desired by buyers.
 The quantity demanded is the amount of a
product people are willing to buy at a certain price
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Demand Relationship
 The relationship between price and quantity
demanded is known as the.
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Supply
 represents how much the market can offer.
 The quantity supplied refers to the amount of a
certain good producers are willing to supply when
receiving a certain price.
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Price
 is a reflection of supply and demand.
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If the price is competitive, the demand is
high and otherwise.
But, one must not be mistaken that price is the only determinant
in the level of demand. Factors such as taste, time, and
population must be considered as well.
Recession is the economy shrinking for two
consecutive quarters with a decrease in the
Gross Domestic Product
There is only an economic growth of
3% for two successive quarters.
Therefore, a global economic growth of 3% or
less is equivalent to global recession
If the recession continues for next quarter, then
we go through DEPRESSION
Why is it that the UNITED STATES is the only
country in the limelight of global recession
while there are also other countries suffering
from the same crisis?
United States is the world's largest economy
and it has a strong trade and financial linkages
with many other economies, most of these
globally synchronized recession episodes also
coincide with U.S. recessions.
CAUSES and EFFECTS
Of
RECESSION
The causes of recession may vary depending on
the period. Recession may be caused by
currency crisis, inflation, war, speculation, or
national debts.
911 Terrorists’ Attack in the United States.
Terrorists’ Attack on 11th September in US
Created fear in people
People cancelled their travel plans
Resulted in low occupancy rates
Airlines & Hotel Industries badly hit
Airline & Hotel Industries offered discounts,
gift coupons, to attract people
But, still, no improvement in occupancy
rate
Airline & Hotel Industries started
“Cost Reduction” activities
CONTINUED
IN NEXT SLIDE
Terrorists’ Attack on 11th September in US
Airline & Hotel Industries started
“Cost Reduction” activities
i] Reduce No. of flights
ii] Lay off people
iii] Salary reduction to
“Not laid off people”
In flight meals reduced
Low or No income to
spend and buy goods
They became careful due
to the fear of loss of job
Meals supplying company
got the hit
Demand for other goods
come down
Started saving money
instead of spending
Catering company now,
lays off people
Demand for other goods
come down
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financial market problems
 liquidity crunch
 subprime mortgage crisis
 price of oil in the world market.
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business condition that results in having too
little cash and other current assets to be able
to pay current liabilities as the liabilities
mature
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In other words, it is a crisis that occurs when a
business experiences a lack of cash required
to grow the business, pay for day-to-day
operations, or meet its debt obligations when
they are due, causing it to default.
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offered/issued at a higher interest rate to
persons who do not qualify for prime rate
loans. With the following perks:
 No down payment required
 Credit Rating Ignored
 Credit history Ignored
 No proof of employment required
 No proof of ability to pay mortgage (income)
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inability of homeowners to make their mortgage
payments
 due primarily to adjustable rate mortgages resetting
borrowers overextending, predatory lending
speculation and overbuilding during the boom period
risky mortgage products
high personal and corporate debt levels
financial products that distributed and perhaps
concealed the risk of mortgage default
 monetary policy
 international trade imbalances, and government
regulation (or the lack thereof)
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oil shocks create global recessions by
transferring billions of dollars of income
from economies where consumers spend
every cent they have, and then some, to
economies that sport the highest savings
rates in the world
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Oil is very necessary in the everyday
transactions and actions of firms and as well
as the individuals.
It is needed to run electricity and also for
transportation so if the price of oil in the
world market is remarkably high, the prices of
the basic commodities will dramatically
increase because electricity and gas for
transportation is needed in the production
and delivery of the commodities.
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one of the most developed countries in the
world
economy is largely driven by consumption
expenditure
Consumption expenditure is made up three
components: income, savings and borrowed
funds
In 2008, 70% of the GDP of the US economy
is accounted by household or personal
consumption
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Therefore, consumers are responsible for the
direction of the country’s economy
Consumers also contributed to the country’s
high GDP simply by spending on goods and
services
A major component in US consumption
expenditure is borrowed funds
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Borrowed funds include mortgage equity
withdrawals and credit card debt
 These are responsible for the country’s “economic
boost”
 It contributed in corporate earnings and rise in the
stock market
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As soon as consumers began to cut back on
expenses corporate profits decrease
 Resulting to a recession in the US economy
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Effects of recession on consumption
expenditure:
 Increase in unemployment  decrease in income
 decrease in consumption
 Uncertainty of means of income  increase in
savings  decrease in consumption
 Decrease in home prices  decrease in borrowed
funds  decrease in consumption
Decrease in consumption  decrease in GDP
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one of the largest developing countries
Chinese Minister of Commerce Chen Deming:
“As one of the fastest growing consumer markets,
China is a world leader in mobile phone sales,
domestic tourism, and broadband network
penetration.”
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China’s economy is not only driven by
consumption but also by its exports and
investments
 in 2008, consumption is only 37% of China’s GDP
▪ exports -27%
▪ Investments- 41% of the GDP
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Factors of consumption growth:
 rapidly increasing level of consumer confidence
 absence of household debt
 strong income growth in the past few years
 mild deflation to moderate the absence of wage
growth this year
 strong demand for goods and services by the
large number of Chinese who only recently earned
enough money to move into the consuming class
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Today, china has the second largest
consumption of gold and automobiles in the
world and the third in the consumption of
luxury items and health care supplies
They are currently the second largest
consumer market in Asia next to Japan and
are predicted to be the second largest in the
world next to the US in 2015
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Mixed economic system
one of the newly industrialized emerging
market economies in the world
In 2007, it was ranked 37th largest economy
according to purchasing power parity by the
International Monetary Fund
one of the fastest growing economies in Asia
with a GDP growth rate of 7.3% in 2007 but
declined to 4.5% in 2008 as a result to the
global financial crisis
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Philippines total consumption is dependent
upon traditional hydrocarbon sources of
energy
 oil companies and the government used to have a
working compromise on the price of the
petroleum products
 in May of 2008, the oil companies broke from the
agreement and began raising prices more quickly
to recover from their losses
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Increase in oil prices  deteriorated peso’s
purchasing power  increase in cost of
goods and services  decrease in
consumption
Inflation peaked on August 2008 with 12.4%
but has declined ever since (April 2009-4.8%)
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Another factor that can increase
consumption is the steady deployment of
overseas Filipino workers
 Country deploys 3,000 Filipinos daily
 Destinations: Saudi Arabia (60,000 job openings)
and Qatar (20,000 job openings) – prefer Filipinos
who are more skilled and disciplined than other
nationalities
More OFWs  more income for their families 
higher consumption
In June 2009, Philippines have reached its
2009 growth target between 0.8-1.8% after
the economy stalled for the first three
months of the year
 Central bank deputy governor Diwa
Guinigundo:
“the global economic crisis may have caused
the consumers to put their income to savings
rather than to consumption.”
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Japanese is popularly known as people who
saves more and spends less branding them
as “UNIQUELY THRIFTY” people
“The Japanese used to be big savers,
but they no longer are”
~Charles Yuji Horioka (2005)
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They used to rely relatively little on
borrowing, but they now borrow at high
levels.
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But, they still continue to possess a high level
of assets while holding conservative
portfolios
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Japanese are high savers during the post-war
period but has been low since 1996.
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Other factors that influence the change:
 change in allowance amount
 revisions of government policies
 influence of foreigners that slightly deferred them
from their Confusian way of living.
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factors that might affect the differences in
national savings rate
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Capital gains
Income uncertainty
Income distribution over a lifetime
Constraints on Borrowing
Retirement behavior
The welfare state
Demography
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difference of each country in terms of their
income, consumption and wealth
1. Gross labour income is earned at markedly
different times in the different countries.
2. The pension payments in retirement are similar
across the countries.
3. The welfare system in the UK is more generous
and less expensive than in the other two
countries.
4. Benefits in kind for the old in Italy are drastically
lower then they are in any other country.
5. Consumption is at its highest when they are aged
between 50 and 55 in the Us and in between 40 and
50 in the Italy and UK.
6. When the people in Italy are aged between 45 and
65, they are almost twice as likely to have their adult
children, aged between 20 and 30 living with them
as compared to their peers in the UK and US. This
will cause individuals to consume more from the
ages of 20-30 and 45-65 to other periods of their
lives.
The Differences in Savings
UK
7.7
US
ITALY
7.8
11.5
Net Government Expenditure Share (G/Y), % 7.1
6.9
10.2
Net Household Saving Rate (S/Y), %
Benefits in kind, allocated to children /Y, %
8.4
10.5
11.6
Net National Saving Rate (S/Y),
5.2
4.6
5.8