Change in Consumption

A change in consumption is caused by any of the following factors

  • Changes in income: Income increases consumption increases and vice versa.
  • Changes in interest rates: Fall in interest rates will make borrowing money cheaper. Consumers will now be tempted to take loans and purchase goods and services. Consumption will rise. On the other hand if the interest rates increase, borrowing becomes expensive. Consumers will be more tempted to save rather than spend. Consumption will fall.
  • Changes in wealth: A rise in house prices or the value of stock and shares makes a person feel wealthy. Consumers feel more confident and tend to spend more .
  • Changes in consumer confidence: Higher consumer confidence is likely lead to increased consumption.

Change in Investment

  • Interest Rates: If interest rates are low firms will find it easy to borrow funds for investment. Investment increase when interest rates fall.
  • Changes in National Income: If the national income increases, firms will have to invest further to increase output (induced investment).
  • Technological change: Regular changes in technological front demand firms to invest in order to keep up with the changes and remain competitive.
  • Business Confidence: The economic environment in an economy is a major factor in determining the investment level. When an economy is showing signs of healthy growth, firms will have positive expectation and will invest in expanding their facilities and to meet higher demands in the future. During troughs firms will be more conservative in their investments and thus AD will be affected.

Change in Government Expenditure

Government Expenditure depends on

  • Macroeconomics objectives: If the government is considering increasing employment then it might increase its spending on public projects.
  • Condition of the economy: During phases of slow economic growth, government is more likely to increase its spending in order to stimulate the economy.

Changes in net exports

Exports are domestic goods bought by foreigners. Exports will rise when

  • Foreigners income rise
  • Exchange rate of the exporting country is falling.
  • The economy follows a more liberal trade policy i.e. free trade increase
  • Inflation rate in the economy is comparatively lower than its trading partners.

Imports are the goods bought from foreign country. Imports will rise when

  • Domestic income rises. This is because people will increase their consumption and thus imports will increase.
  • Exchange rate of the importing country increase. Now it becomes cheaper for the country to purchase from outside as their currency is stronger than their trading partners.
  • If the economy is following a liberal trade policy i.e. free trade increases.
  • Inflation rate is high

New Youtube Channel - ThinkIGCSE

Hi Everyone, I have launched a new YouTube channel with more than a 100 videos on  Economics and Business Studies, tailored specifically for IGCSE and A Level and IBDP students.

Subscribe now and join us on this learning journey: @thinkIGCSE

Exciting News!

IMPORTANT MESSAGE

Quizzes and worksheets on this website have been developed in Flash format. Flash is no more supported by browsers. Therefore, you might see blank pages on some instances. Install Flash player plugin for Chrome from Chrome Web Store. Click here 

Similarly, for other web browsers you will have to activate the relevant flash player plugins.

JOIN OUR ONLINE COURSES

WHO'S ONLINE

We have 429 guests and no members online

Crosswords

PDF FILE

Download

MindMaps

PDF FILE

Download

Save
Cookies user preferences
We use cookies to ensure you to get the best experience on our website. If you decline the use of cookies, this website may not function as expected.
Accept all
Decline all
Read more
Analytics
Tools used to analyze the data to measure the effectiveness of a website and to understand how it works.
Google Analytics
Our website uses Google Analytics to understand how you interact with our site and improve your browsing experience. These cookies collect information in an anonymous form, including the number of visitors to the site, where visitors have come from, and the pages they visited. The data helps us analyze trends and user behavior to enhance our website's functionality and content.
Accept
Decline
Marketing
Set of techniques which have for object the commercial strategy and in particular the market study.
Marketing
Our website uses Google marketing cookies to deliver personalized ads and measure the effectiveness of our advertising campaigns. These cookies track your online activity to help us show you relevant ads on Google services and partner websites.
Accept
Decline