Consumption and Saving

Consumption Savings

- DI is the basic determinant of consumption and personal savings.

- Households can consume more than their incomes by liquidating (selling for cash) accumulated wealth or by borrowing - C0.

Consumption Savings

- The 45 degree line represents DI=C, if households were to consumer 100% of their DI at every level of DI.

Average propensities

- The fraction, or percentage, of any total income which is consumed is called the average propensity to consume.

APC = C/DI

(средняя склонность к потреблению - APC)

-The fraction, or percentage, of any total income which is saved is the average propensity to save.

APC = S/DI

The fraction of DI which is consumed declines as DI rises

Marginal Prorensities

- The proportion of any change in income consumed is called the marginal propensity to consume.

- The fraction of any change in income saved is the marginal propensity to save.

C and S

C = C0 + MPC (DI)

S = -C0 + MPS (DI)

Nonincome determinants of C and S:

- Wealth (real and financial assets) - the greater the wealth households have accumulated, the larger the amount of C and the smaller the amount of S of any level of current account.

- Expectations about future prices, income, goods avalible

- Household Debt. When consumers increase their debt, they can increase their current C. But whebn levels of debt get abnor

- Taxation.