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Analysis

  • What is consumption expenditure
  • Determinants
    • Induced consumption
    • Autonomous consumption

 

Introduction

  • Consumption expenditure is the expenditure made by households on goods and services
  • Types of consumption
    • Induced consumption
      • Dependent on disposable income
    • Autonomous consumption
      • Independent on disposable income

 

Point: Induced consumption is consumption that is dependent on disposable income

  • Positively related to disposable income
  • Rise in disposable income → Rise in induced consumptions and vice versa
  • Consumption function shows the consumption expenditure of households at each disposable income
  • Rise in induced consumption can be shown by an upward movement along the consumption function

  • In the diagram above, a rise in disposable income (Yd) from Yd1 to Yd0 → Upward movement along the consumption function (C) → Rise in consumption expenditure (C) from C0 to C1
  • Extent of effect of an increase in disposable income on consumption expenditure depends on the marginal propensity to consume
    • Larger the marginal propensity to consume → Larger the rise in consumption expenditure
  • Culture of thrift → Low marginal propensity to consume

 

  • Disposable income could rise due to several reasons
    • Rise in national income → Unplanned fall in inventories → Rise in factor inputs → Rise in employment → Rise in household income → Rise in disposable income
    • Fall in direct taxes (e.g. personal income tax and corporate income tax) → Rise in disposable income
    • Rise in transfer payments (e.g. transfer payments, social security benefits, rise in bond payments etc) → Rise in disposable income
    • Main determinant is national income as government does not often change direct taxes and transfer payments

 

Point: Autonomous consumption is consumption that is independent of disposal income. It is determined by consumer confidence, the wealth of households, interest rates, expectations of price changes, availability of credit and distribution of income

  • Rise in autonomous consumption can be shown by a vertical upward shift in the consumption function

  • In the above diagram, a vertical upwards shift in the consumption function (C) from Ca to Cb → Rise in consumption expenditure (C) from C0 to C1 at the same disposable income (Y0)

 

  • Autonomous consumption could increase due to
    • Major determinants
      • Consumer confidence
        • Singapore economy export dependent due to small domestic demand → Strong external economic environment of Singapore → Financial security → Rise in consumer confidence → Rise in consumption expenditure
      • Wealth of households
        • Singaporeans hold a large proportion of their wealth in form of properties
        • Property bubble → Large rise in wealth of households → Financial security → Large increase in consumption expenditure
      • Although interest rates, expectations of price changes, and the availability of credit also affect consumption expenditure in Singapore, they are minor determinants
        • Interest rates
          • Lower interest rates → People induced to borrow for expenditure OR people reduce their marginal propensity to save due to low returns → Higher consumption
            • However interest rates in Singapore are generally low → Little impact on consumption expenditure
          • Expectations of price changes
            • Expectation of future rise in prices → Higher consumption now
              • Well maintained general price level → Low expectation of future price changes → Little impact on consumption expenditure
            • Availability of credit
              • Easy credit → Easy to obtain loans that can be used for consumption → Higher consumption
                • Large amount of regulation on loanable funds market by Monetary Authority of Singapore → Little change to credit restrictions → Little impact on consumption expenditure

 

In conclusion

  • There are many factors that influence consumption expenditure, however, due to the nature of Singapore, national income, wealth of households and consumer confidence are the largest determinants of consumption
  • With that said, consumption expenditure only takes up a small portion of Singapore’s aggregate demand and maintaining it or changing it will not make much of an impact on Singapore’s economy

 

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