Before we looked at how markets for particular products work and how sometimes they fail to achieve allocative efficiency.But now we are moving to study of the whole economy.And factors that have an influence on economy as a whole now will be shown by aggregate demand and aggregate supply.Aggregate means total,so:
AGGREGATE DEMAND(AD):the total demand for a country`s goods and services at a given price level and in a given time period.
Formula for aggregate demand is: AD=C+I+G+(X-M),where C is consumer expenditure,I-investment,G-government spending,X-exports and M-imports.
PRICE LEVEL: the average of of each of the prices of all the products produced in an economy.
CONSUMER EXPENDITURE(CONSUMPTION):spending by households on consumer products,such as clothing,food and insurance.For the most countries it is the largest component of aggregate demand.
INVESTMENT: spending on capital goods (delivery vehicles,machines and office buildings).But it is the most volatile component of aggregate demand.
GOVERNMENT SPENDING: spending by the central government and local government on goods and services(education,health and police service).But it does not include transfer payment,job seeker`s allowance and state pensions.
TRANSFER PAYMENT:money transferred from one person or group to another not in return for any goods and services.
JOB SEEKER`S ALLOWANCE: a benefit paid by the government to those unemployed and trying to find a job.
EXPORTS: products sold abroad.
IMPORTS:products bought from abroad.
NET EXPORTS: the value of exports minus the value of imports.Net exports add foreigners` spending on the countries goods and services and deduct spending by the country`s population on imports.This component can make positive or negative contribution to aggregate demand,with other words it can cause trade surplus or trade deficit.
TRADE SURPLUS: the value of exports exceeding the value of imports.
TRADE DEFICIT:the value of imports exceeding the value of exports.
CONSUMER EXPENDITURE.
There are a range of influences on how much households spend:
*Real disposable income(income after taxes on income have been deducted,state benefits have been added and results have been adjusted to take into account changes in price level).
This is the main influence on consumption.Richer households and richer economies will spend more than the poorer ones.But the average propensity to consume(APC)may fall as disposable income rises.
The average propensity to consume(APC):the proportion of disposable income that is spent.It is consumer expenditure divided by disposable income.
*Wealth.
The more wealth people have(their home,saving account,shares)-the more their tend to spend.
*Consumer confidence and expectations.
CONSUMER CONFIDENCE:how optimistic consumers are about future economic prospects.When consumers are optimistic about their future (expecting their job prospects to be good and wages to be hight) they spend more.So,sometimes proportion of income spent can rise as income rises.
*The rate of interest.
RATE OF INTEREST:the charge for borrowing money and the amount paid for landing money.
Changes in a rate of interest are another important influence on consumer expenditure,but also it can be overshadowed by the state of consumer confidence.Usually a fall in the rate of interest will stimulate a rise in consumer expenditure.There are 3 main reasons for that:
1)It makes it cheaper for consumer to borrow in order to buy expensive items
2)It reduces the incentive to save
3)Those who paying interest on any type of loans will have more money to spend.
But the net savers (those who save more than they spend)will lose out if the rate of interest falls.Also there is possibility that even if a rate of interest falls spendings will not rise.It can be because people are worried too much about the future or they may think that the rate will fall further.
*The age structure of the population
*DISTRIBUTION OF INCOME-it is how income is shared between households in a country.
Poor people spend more proportion of their income that the rich people do.So,government measures that redistribute income from the rich to the poor are likely to increase total consumer spending.
*INFLATION-a sustained rise in the price level.
this is difficult to determine what impact inflation has on consumers spending.Because,if people expect that the prices will rise rapidly in the future they may increase their spending now.Or,on the other hand,people increasing their savings rather than spendings.
SAVING.
It is real disposable income minus spending.
Well,saving is a not a component of aggregate demand,but still...
Savings may be influenced by:
*Real disposable income.This is the main influence on savings.As real disposable income increases,households save more and also they save a higher proportion of their income.Their average propensity to save rises.
AVERAGE PROPENSITY TO SAVE(APS):the proportion of disposable income saved.Savings divided by disposable income.
*THE RATE OF INTEREST: A rise in the rate of interest usually encourages people to save.There are some people called target savers.They are saving to achieve a particular sum in savings.In their case higher interest rate would reduce the amount they have to save.
*Confidence and expectations.
*Saving schemes.
Some saving is contractual, when people agree to save a certain amount on a regular basis in insurance and pension schemes.
*Range of financial institutions.
In a countries with a hight number of established and trusted financial institutions people will have a confidence to place their savings with this institutions.But as financial system becomes more developed saving rate may fall.Because people find it easier to borrow.
*Government policies
*The age structure of the population.
People of the middle years save more than young people.
DISSAVE: spending more than disposable income
SAVING RATIO:savings of the proportion of disposable income.
TO BE CONTINUED...
