 Consumption and saving  Primarily determined by Disposable Income (DI)  Direct relationship  Consumption schedule (C)  Planned household spending.

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Presentation transcript:

 Consumption and saving  Primarily determined by Disposable Income (DI)  Direct relationship  Consumption schedule (C)  Planned household spending (in our model)  Saving schedule (S)  DI minus C  Dissaving can occur ©2013 McGraw-Hill Ryerson Ltd.1Chapter 8, LO1

The line C, which generalizes the relationship between consumption and disposable income, indicates a direct relationship and shows that households consume most of their income. ©2013 McGraw-Hill Ryerson Ltd.2Chapter 8, LO1

APC= consumption income APS= saving income MPC= change in consumption change in income MPS= change in saving change in income APC + APS = 1 MPC + MPS = 1 ©2013 McGraw-Hill Ryerson Ltd.3Chapter 8, LO1

©2013 McGraw-Hill Ryerson Ltd.4Chapter 8, LO1 (1) Level of Output and Income GDP=DI (2) Consumption (C) (3) Saving (S), (1) – (2) (4) Average Propensity to Consume (APC ), (2)/(1) (5) Average Propensity to Save (APS), (3)/(1) (6) Marginal Propensity to Consume (MPC),  (2)/  (1)* (7) Marginal Propensity to Save (MPS),  (3)/  (1)* (1) $370$375$ (2) (3) (4) (5) (6) (7) (8) (9) (10)

C S Consumption schedule Saving schedule Saving $5 billion Dissaving $5 billion Dissaving $5 billion Saving $5 billion Consumption (billions of dollars) Saving (billions of dollars) Disposable income (billions of dollars) LO1 ©2013 McGraw-Hill Ryerson Ltd.5Chapter 8, LO1

Source: Organization for Economic Cooperation and Development, OECD, Derived from OECD household saving rates as percentages of disposable income. ©2013 McGraw-Hill Ryerson Ltd.6Chapter 8, LO1

Disposable income Consumption Saving S C MPC = MPS = =.75  C ($15)  DI ($20)  S ($5) 5 20 =.25 LO1 ©2013 McGraw-Hill Ryerson Ltd.7Chapter 8, LO1

 Amount of disposable income is the main determinant  Other determinants  Wealth  Borrowing  Expectations  Real interest rates ©2013 McGraw-Hill Ryerson Ltd.8Chapter 8, LO1

 Switching to real GDP  Changes along schedules  Simultaneous shifts  Taxation  Stability ©2013 McGraw-Hill Ryerson Ltd.9Chapter 8, LO1

C0C0 S0S0 Real GDP (billions of dollars) Consumption (billions of dollars) Saving (billions of dollars) C2C2 C1C1 S1S1 S2S LO ©2013 McGraw-Hill Ryerson Ltd.10Chapter 8, LO1