To consume most goods and services is to eat them up, burn them, wear them out, see them break or rust out or crack or tumble down, according to Mason Gaffney insights in his column in Groundswell.

is the value of goods and services bought by people. Individual buying acts are aggregated over time and space.

Composition:1. Consumption may be divided according

to the durability of the purchased objects.

durable goods (as cars and television sets)

non-durable goods (as food)

2. Consumption is divided according to the needs it satisfies.

10 chapters of expenditure: (1) food (2) clothing and foot wear(3) housing(4) heating and energy(5) health(6) transport(7) house furniture and appliances(8) communication (9) culture and schooling(10)entertainment

refers to the part of person’s income which is not spent on consumption. It therefore involves a sacrifice because consumption has to be given up for one to save.

Consumption is the act of using goods and services to satisfy human wants (Pagoso et al., 2009).

To consume most goods and services means eating them up, cooking them, wearing them out, seeing them break, rust out, crack, or tumble down. (Gaffney, 2005).

Consumption or even purchase goods and services, entails an income in order to be done.

Induced Consumption the concept that the increase in personal

consumer spending (consumption) that occurs with an increase in disposable income (income after taxes and transfers)

Such consumption considered induced by income when expenditure on these consumables varies as income changes.

Focuses on induced consumption as it is the component that is affected by income.

Consumption function quantifies induced consumption through Marginal Propensity to Consume or MPC

Quantifies the part of income which is consumed

For example, if a household earns one extra dollar of disposable income, and the marginal propensity to consume is 0.65, then of that dollar, the household will spend 65 cents and save 35 cents.

MPC is the derivative of consumption, represented by C, in respect to disposable income which is represented by Y

MPC is equal to ΔC / ΔY, where ΔC is change in consumption, and ΔY is change in income

Income Consumption

100 50

200 100

300 150

Based on the given data MPC can be computed as:

MPC= ΔC / ΔY▪=100-50/200-100▪=0.5

Computation of MPC entails the Multiplier Concept which is the process of generating income through the circular flow exchange between the households and the firms (Pagoso et at., 2006).

Suppose a large corporation decides to build a factory in a small town and that spending on the factory for the first year is Php5 million. That Php5 million as the initial investment will go to electricians, engineers and other various people building the factory.

Assuming that MPC is equal to 0.8 and the initial investment equal to P5 Million, the consumption therefore is equal to Php4 million

In another, assume that Php4 million will in turn be spent by various business and individual who receives that amount and using the MPC equivalent to 0.8. With the given data, the consumption can be computed as 4,000,000 x 0.8 = Php3.2 million.

Therefore, the multiplier can be calculated as:

Multiplier = 1 / (1 – MPC) = 1 / (1 – 0.8) = 1 / 0.2 = 5

This means that the flow will go on 5 times.

Small changes in investment or government spending can create much larger changes in total output. 

Positive in macroeconomic policy, it can effect substantial improvements with relatively small amounts of autonomous expenditures. 

While the negative aspect is that a small decline in business investment can trigger a larger decline in business activity and, thereby, create instability.

With MPC assumed as positive: as income increases, consumption

increases, but not by as much as the increase in income.

Consumption and savings has inverse relationship which means as consumption increases savings decreases and vice versa.s

Taste and preferencePopulation IncomePrice Level (Prices of Related

Goods) Innovation and PromotionNumber of buyersTraditions Expectations about Future Prices,

Income and Availability of Supply.Other Factors

depends on the product that satisfies one’s desires and wants

A change in collective attitude can change influence taste or preference, consumption, and marginal propensity to consume

Duesenberry’s Relative Income Hypothesis difference in consumption behavior

could be explained by the difference in income level relative to what one is accustomed to

EXAMPLE family residing in a rural area may

consume less using their income compared with a family of the same income level in a highly urbanized place like Metro Manila.

That is because the rural family is accustomed to lower standards of living while the urban family follows otherwise.

Taste and preference also differ across different racial, ethnic, age, and occupational groups

Values have something to do with attitudes and therefore, affect taste or preference Gaya-gaya system Colonial Mentality

Population size also determines consumption needs and, therefore, affects consumption expenditures with a given income

An increase in household size with income and other factors as constant may decrease the propensity to consume and increase savings at the expense of non-essential items

The level of income can increase with more infusions in the circular flow

Propensity to consume varies across consuming units to which income is distributed because of the varying influence of demand factors. Households (lower income brackets) =

dissave Households (higher income bracket) = save

and consume

As your income increases, your demand increases for higher quality of goods will also tend to increase

markedly.

A change in the general price level can spur further consumer’s reaction through a shift in the individual demand curves which changes aggregate consumption expenditure.

The price of goods is important, but prices of related products also influence demand.

Substitute goods goods that consumers buy as

replacements of the goods whose prices have gone high.

Complementary goods goods that are consumed together. Example▪ DVD Players and DVDs, Pandesal and Coffee

expands the line of consumer’s choice and extend the influence of demand factors on consumption and propensity to consume income.

The introduction of new products can create a demand and increase aggregate consumption.

Promotions and advertising serve as a medium of introducing new products in the market which create demand and consumption.

They also give more information about existing products to guide consumers in attaining a better mix of items. More advertising can change this mix and influence consumption expenditure from the same income.

An increase in the number of consumers in a market will increase demand. Fewer consumers will decrease demand.

The influence of traditions on consumer’s demand is significantly observed during the celebration of special occasions such as Christmas, Valentine’s Day, All Saints’ Day and others.

Example Christmas season = more people will

purchase and consume fiesta ham.

Consumers who expect a shortage or sharp price increases in the coming weeks or months may rush out and buy storable goods now, thus, increasing current demands.

The uncertainties brought about by the “Gulf Crisis” in 1990 resulted into “panic buying” among many Filipino consumers. This created shortages and drove prices up. Panic buying adversely affects the market and the economy as a whole because it creates artificial shortages which in turn cause an increase in the prices of commodities.

General lifestyles A standard level of consumption the family

tries to maintain over time. Decisions regarding active saving strategies,

like an investment scheme for pension aims. The relative success of past investment in

shares or other financial instruments; in fact, a stock-exchange boom is likely to promote a euphoria tide with growing consumption.

Opportunities of consumer credit, depending in turn by interest rates and marketing strategies by banks and special consumer credit institution.

Past decisions on durables Status symbols diffusion - "social musts"

Before, understanding “Recession”,

we need to understand the market

Demand to how much (quantity) of a product or

service is desired by buyers. The quantity demanded is the amount of

a product people are willing to buy at a certain price

Demand Relationship The relationship between price and

quantity demanded is known as the.

Supply represents how much the market can

offer. The quantity supplied refers to the

amount of a certain good producers are willing to supply when receiving a certain price.

Price is a reflection of supply and demand.

If the price is competitive, the demand is high and otherwise.

But, one must not be mistaken that price is the only determinant in the level of demand. Factors

such as taste, time, and population must be considered as well.

Recession is the economy shrinking for two consecutive quarters with a

decrease in the Gross Domestic Product

There is only an economic growth of

3% for two successive quarters.

Therefore, a global economic growth of 3% or less is equivalent to global

recession

If the recession continues for next quarter, then we go through

DEPRESSION

Why is it that the UNITED STATES is the only country in the limelight of

global recession while there are also other countries suffering from the

same crisis?

United States is the world's largest economy and it has a strong trade and financial linkages with many other economies, most of these globally synchronized recession episodes also coincide with U.S.

recessions.

CAUSES and EFFECTS

OfRECESSION

The causes of recession may vary depending on the period. Recession may be caused by currency crisis,

inflation, war, speculation, or national debts.

911 Terrorists’ Attack in the United States.

Terrorists’ Attack on 11th September in US

Created fear in people

People cancelled their travel plans

Airlines & Hotel Industries badly hit

Resulted in low occupancy rates

Airline & Hotel Industries offered discounts, gift coupons, to attract people

But, still, no improvement in occupancy rate

Airline & Hotel Industries started “Cost Reduction” activities CONTINUED

IN NEXT SLIDE

Terrorists’ Attack on 11th September in US

i] Reduce No. of flights ii] Lay off peopleiii] Salary reduction to“Not laid off people”

In flight meals reducedLow or No income to spend and buy goods

They became careful dueto the fear of loss of job

Meals supplying companygot the hit

Catering company now,lays off people

Demand for other goodscome down

Started saving moneyinstead of spending

Demand for other goodscome down

Airline & Hotel Industries started “Cost Reduction” activities

financial market problems liquidity crunch subprime mortgage crisis price of oil in the world market.

business condition that results in having too little cash and other current assets to be able to pay current liabilities as the liabilities mature

In other words, it is a crisis that occurs when a business experiences a lack of cash required to grow the business, pay for day-to-day operations, or meet its debt obligations when they are due, causing it to default.

offered/issued at a higher interest rate to persons who do not qualify for prime rate loans. With the following perks: No down payment required Credit Rating Ignored Credit history Ignored No proof of employment required No proof of ability to pay mortgage

(income)

inability of homeowners to make their mortgage payments due primarily to adjustable rate mortgages resetting

borrowers overextending, predatory lending speculation and overbuilding during the boom

period risky mortgage products high personal and corporate debt levels financial products that distributed and perhaps

concealed the risk of mortgage default monetary policy international trade imbalances, and

government regulation (or the lack thereof)

oil shocks create global recessions by transferring billions of dollars of income from economies where consumers spend every cent they have, and then some, to economies that sport the highest savings rates in the world

Oil is very necessary in the everyday transactions and actions of firms and as well as the individuals.

It is needed to run electricity and also for transportation so if the price of oil in the world market is remarkably high, the prices of the basic commodities will dramatically increase because electricity and gas for transportation is needed in the production and delivery of the commodities.

one of the most developed countries in the world

economy is largely driven by consumption expenditure

Consumption expenditure is made up three components: income, savings and borrowed funds

In 2008, 70% of the GDP of the US economy is accounted by household or personal consumption

Therefore, consumers are responsible for the direction of the country’s economy

Consumers also contributed to the country’s high GDP simply by spending on goods and services

A major component in US consumption expenditure is borrowed funds

Borrowed funds include mortgage equity withdrawals and credit card debt These are responsible for the country’s

“economic boost” It contributed in corporate earnings and

rise in the stock market

As soon as consumers began to cut back on expenses corporate profits decrease Resulting to a recession in the US

economy

Effects of recession on consumption expenditure: Increase in unemployment decrease in

income decrease in consumption Uncertainty of means of income increase

in savings decrease in consumption Decrease in home prices decrease in

borrowed funds decrease in consumption

Decrease in consumption decrease in GDP

one of the largest developing countries

Chinese Minister of Commerce Chen Deming:

“As one of the fastest growing consumer markets, China is a world leader in

mobile phone sales, domestic tourism, and broadband network penetration.”

China’s economy is not only driven by consumption but also by its exports and investments in 2008, consumption is only 37% of

China’s GDP▪ exports -27% ▪ Investments- 41% of the GDP

Factors of consumption growth: rapidly increasing level of consumer

confidence absence of household debt strong income growth in the past few years mild deflation to moderate the absence of

wage growth this year strong demand for goods and services by the

large number of Chinese who only recently earned enough money to move into the consuming class

Today, china has the second largest consumption of gold and automobiles in the world and the third in the consumption of luxury items and health care supplies

They are currently the second largest consumer market in Asia next to Japan and are predicted to be the second largest in the world next to the US in 2015

Mixed economic system one of the newly industrialized emerging

market economies in the world In 2007, it was ranked 37th largest

economy according to purchasing power parity by the International Monetary Fund

one of the fastest growing economies in Asia with a GDP growth rate of 7.3% in 2007 but declined to 4.5% in 2008 as a result to the global financial crisis

Philippines total consumption is dependent upon traditional hydrocarbon sources of energy oil companies and the government used

to have a working compromise on the price of the petroleum products

in May of 2008, the oil companies broke from the agreement and began raising prices more quickly to recover from their losses

Increase in oil prices deteriorated peso’s purchasing power increase in cost of goods and services decrease in consumption

Inflation peaked on August 2008 with 12.4% but has declined ever since (April 2009-4.8%)

Another factor that can increase consumption is the steady deployment of overseas Filipino workers Country deploys 3,000 Filipinos daily Destinations: Saudi Arabia (60,000 job

openings) and Qatar (20,000 job openings) – prefer Filipinos who are more skilled and disciplined than other nationalities

More OFWs more income for their families higher consumption

In June 2009, Philippines have reached its 2009 growth target between 0.8-1.8% after the economy stalled for the first three months of the year

Central bank deputy governor Diwa Guinigundo:“the global economic crisis may have

caused the consumers to put their income to savings rather than to

consumption.”

Japanese is popularly known as people who saves more and spends less branding them as “UNIQUELY THRIFTY” people

“The Japanese used to be big savers, but they no longer are”

~Charles Yuji Horioka (2005)

They used to rely relatively little on borrowing, but they now borrow at high levels.

But, they still continue to possess a high level of assets while holding conservative portfolios

Japanese are high savers during the post-war period but has been low since 1996.

Other factors that influence the change: change in allowance amount revisions of government policies influence of foreigners that slightly deferred

them from their Confusian way of living.

factors that might affect the differences in national savings rate Capital gains Income uncertainty Income distribution over a lifetime Constraints on Borrowing Retirement behavior The welfare state Demography

difference of each country in terms of their income, consumption and wealth1. Gross labour income is earned at markedly

different times in the different countries.2. The pension payments in retirement are

similar across the countries. 3. The welfare system in the UK is more

generous and less expensive than in the other two countries.

4. Benefits in kind for the old in Italy are drastically lower then they are in any other country.

5. Consumption is at its highest when they are aged between 50 and 55 in the Us and in between 40 and 50 in the Italy and UK.

6. When the people in Italy are aged between 45 and 65, they are almost twice as likely to have their adult children, aged between 20 and 30 living with them as compared to their peers in the UK and US. This will cause individuals to consume more from the ages of 20-30 and 45-65 to other periods of their lives.

The Differences in Savings