Economics » National Income » The Concepts of Consumption, Investment, and Savings

Determinants of Consumption and Savings

Determinants of Consumption and Savings

  1. The level of disposable income: The level of disposable income is the basic determinant of how much households will consume or save. All things being equal, an increase in disposable income will increase consumption expenditure/saving and vice versa.
  2. Total household indebtedness: Debts are paid with current income. If in an economy’s total household debts are huge, there is the likelihood that the current level of consumption expenditure and saving will be low and vice versa.
  3. Fiscal policy: Changes in fiscal policy in the form of taxation will affect the consumption function. For example, increased taxation will adversely affect the consumption function by reducing the disposable income of the people and vice-versa.
  4. Wealth: This refers to the stock of accumulated purchasing power stored up from the past. For example, savings done in the past can be used to finance current consumption. The higher an economy’s wealth, all other things being equal, the higher will be current consumption.
  5. Expectations: Households’ anticipation regarding future prices of goods, their nominal income and the availability of goods may have an impact on their current spending. The anticipation of rising prices and product shortages tend to cause more spending and less saving, and vice-versa.
  6. Inflation: In an economy, the higher the level of inflation, the lower the volume of savings and vice-versa.

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