Explain the main determinants of the level of consumption expenditure in an economy.

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Explain the main determinants of the level of consumption expenditure in an economy.

Consumption expenditure (C) is one of four elements, which denotes the total spending on goods and services produced in an economy. This is known as Aggregate Demand. The other three elements of Aggregate Demand are Investment expenditure (I), Government spending (G) and the Net expenditure on exports and imports (X-M). The equation for AD can be written as: -

AD = C + I + G + (X-M).

The main determinants of Consumption expenditure are: -

* Changes in disposable income: This is a key determinant of consumption expenditure. It is common sense to see that, if a persons income increases so does the total spending on goods and services by that person.

This would lead to a shift to the right in the AD curve.

* Interest rate changes: Higher interest rates lead to a decrease in spending by consumers. People will be able to save more and will be able to pay back more money to mortgage repayments.

This would lead to a shift to the right in the AD curve.

* Changes in unemployment