-
- Spending depends on disposable income: income after taxes.
- Higher disposable income -> increased spending and saving.
-
- Wages and salaries.
- Interest on savings: return on capital.
- Rent from leasing property: return on land.
- Dividends from shares: return from owning company shares.
- Profit from a business: return on enterprise.
-
- Low-income earners spend mostly on necessities such as food and housing.
- Middle-income earners spend on necessities and some luxuries.
- High-income earners spend the smallest proportion on necessities and more on luxuries.
-
- Rising asset values -> positive wealth effect -> increased spending.
- Falling asset values -> negative wealth effect -> decreased spending.
-
- Higher interest rates -> spending decreases.
- Borrowing becomes costlier.
- Saving becomes more attractive.
- Loan repayments increase, reducing disposable income.
-
- High confidence during economic booms -> increased spending on luxury goods and services.
- Low confidence during recessions -> reduced spending and more saving.
-
- Rising prices reduce purchasing power -> spending decreases.
- Borrowing may increase to maintain living standards.
-
- Younger individuals spend more on lifestyle needs.
- Older individuals spend on family and save for retirement.
- Larger households spend more on necessities.
Topic 3.2 - Notes and practice
CAIE IGCSE Economics: Households
Open the map branches one at a time. Start with the factor, then expand the examples.
Branches opened
0 / 3
Interactive map
Spending, saving and borrowing
Households
-
- Saving occurs when individuals set aside a portion of their current income for future use.
-
- Future spending: holidays, retirement or children's education.
- Precautionary reasons: emergencies such as accidents, job loss or unforeseen events.
- Depositing money in banks for security and earning interest.
-
- Provides financial security for emergencies.
- Helps achieve long-term goals such as retirement or education.
- Earns interest, increasing personal wealth.
-
- Opportunity cost: money saved could be spent on current enjoyment.
- Low returns during periods of low interest rates.
-
-
- High income -> higher savings due to ability to save a larger proportion of earnings.
- Low income -> limited savings due to financial constraints and basic spending priorities.
-
- Higher interest rates encourage saving to earn higher returns.
- Lower interest rates reduce the incentive to save and encourage spending or investment in shares and other assets.
- Higher loan repayment costs can also reduce spending.
-
- High confidence encourages borrowing for investment or spending.
- Low confidence during economic slowdowns increases saving as people spend cautiously.
- Firms borrow more when they expect favorable economic conditions.
-
- Younger adults may save less due to student loans or lower income.
- By the age of 25, savings generally increase as people secure permanent jobs.
- Countries with limited pensions or healthcare provision encourage higher savings.
-
- High borrowing culture: frequent use of credit cards for expenses, for example USA or UK.
- Cautious savers: prioritize savings for emergencies, for example China.
- Lower reliance on credit cards: greater emphasis on saving, for example Japan or Germany.
-
-
- Borrowing occurs when individuals, firms or governments take loans from banks or financial institutions.
- The loan is repaid over time with interest.
-
- To purchase expensive items like cars or holidays.
- To fund private or tertiary education.
- To buy property or land, such as homes, factories or offices.
- To start a business or expand operations.
- To finance large projects, such as overseas business ventures.
-
- Provides immediate access to goods, services or investments.
- Helps fund long-term projects and large expenses.
- Enables business expansion, creating jobs and growth opportunities.
-
- Leads to debt, which can become unmanageable with high interest rates.
- Risk of defaulting on loans, especially for less wealthy individuals or firms.
- High interest rates on credit cards and store cards can increase financial stress.
-
-
- Higher interest rates increase the cost of borrowing and discourage loans.
- Lower interest rates encourage borrowing due to reduced repayment costs.
-
- Higher confidence in the economy encourages borrowing for investment or spending.
- Firms borrow more when they expect favorable economic conditions.
-
- The central bank controls lending by adjusting the cash reserve ratio.
- Lower cash reserve ratios increase money supply, making more funds available for borrowing.
-
- Enable purchases with deferred payments: buy now, pay later.
- High interest rates on unpaid balances discourage excessive use.
- Convenient, but can lead to high debt if not managed well.
-
- Wealthier individuals and profitable firms are more likely to secure loans.
- Banks prefer lending to those with assets or collateral to reduce default risk.
- Example: mortgages are secured against the property purchased.
-
Click a topic or the icon to expand the mind map and learn more.
Quick check
True / False
Disposable income is income left after direct taxes have been paid.
Higher interest rates usually reduce household spending.
Saving involves an opportunity cost because current enjoyment may be given up.
Higher interest rates normally reduce the incentive to save.
Credit cards allow deferred payment but can create high debt if not managed well.
Practice
Try the idea
Coming soon
Coming soonComing soon
Coming soonComing soon
Coming soon