Factors Affecting Consumer Spending
Factors affecting consumer spending affect businesses by causing an increase or a decrease in revenues. This means that these factors can affect businesses positively or negatively. Consumer spending refers to the amount of money that households spend in an economy. This spending includes the money that households use to buy durables like washing machines as well as nondurables like food items. This is also called consumption and it is mostly measured on monthly basis. Consumer spending or household spending is a vital part of the aggregate demand and it is usually broken down into different categories that cover most spending items which include clothing, holidays, transport, housing, recreation and electricity among others.
Why knowing factors affecting consumer spending is important
Consumer or household spending is a vital driving force of the economy. This is because if consumers decide not to spend, businesses would end up being bankrupt and workers would be laid off. Only exports would be left for businesses with the assumption that consumer spending would continue in other countries. Factories and the government would remain open through borrowing. Actually, consumer spending is the most important factor of economic product because the economy can be damaged by even a minor downturn of consumer spending.
The rate at which the economy grows slows down with a drop off of consumer spending. Prices drop and deflation sets in. Continued slowing down of consumer spending can force the economy into recession. This is why businesses and the government should know the factors that influence consumer spending in order to keep them motivated to spend. However, too much spending by households or consumers can affect the economy negatively. This is because increased consumer demand can surpass the ability of businesses to provide the demanded services and goods which increases prices. This will eventually lead to inflation.
Major factors that affect consumer spending and how they do it
Consumption is affected by wealth in two different ways. Increased financial wealth which includes bonds, stocks and money motivates consumers to increase their consumption. Usually, when consumption increases, saving decreases. On the other hand, increased physical wealth which includes appliances, furniture and cars minimizes the need for buying such goods thereby motivating consumers to decrease their consumption while increasing saving.
Government activities are funded by the taxes that are collected from consumers. Most taxes come from the consumers or household income, especially the disposable income. When the government increases taxes, it means that disposable income will be reduced. This will lead to consumption decrease. Because national or total income does not change, taxes will reduce saving. This causes a decrease in other saving and consumption determinants. The opposite happens when taxes are reduced.
- Interest rates
Borrowing that consumers use to finance certain consumption expenditures such as furniture and automobiles is discouraged by high interest rates. This increases return from the income that is diverted to saving in the financial markets. Therefore, a decrease in consumption is experienced and an increase in savings when interest rates are high. On the other hand, borrowing is encouraged by low interest rates and this leads to an opposite reaction.
- Consumer confidence
When consumers are confident about the economic status, they are likely to increase their spending. Nevertheless, since extra spending is not caused by extra income, it has to be derived from saving. Therefore, consumer confidence is likely to cause increased consumption and decreased saving. When consumer confidence decreases, the opposite is likely to happen.
There are two possible effects of unemployment. Unemployed people are less likely to spend more because their personal income is low. Additionally, unemployment leads to negative expectations and this can curb spending while stimulating saving.
When the factors affecting consumer spending are used by the government
When the government intends to stimulate a country’s economy, it increases consumer spending. There are different ways through which the government can do this but tax cuts and giving out more money are the mostly used ways. Such measures lead to an increase in income which leads to more buying by individuals and this increases revenues for companies, subsequently compelling them to hire more employees.
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