Spending, Saving & Borrowing (Cambridge International IGCSE Economics)
Exam board Cambridge International · IGCSEUpdated 2025-08-06
The influences on spending
Spec point — Influences on spending
- Spending in an economy is also called consumption
- The level of consumption by households is heavily influenced by income, interest rates and the level of confidence in the economy
What influences spending in an economy?
| Influence | Explanation |
|---|---|
| Changes to income | - Disposable income is the money that households have left over from their salary/wages after they have paid their taxes and have received any transfer payments/benefits from the government - Consumption increases as disposable income increases and decreases as disposable income decreases |
| Changes to interest rates | - Interest rates are set by the government's Central Bank - Changes to the base rate cause commercial banks to change the lending rates they offer customers - If interest rates increase, the cost of borrowing increases - Higher borrowing costs = less consumption - If interest rates increase, the monthly repayment on any existing loan increases - Higher loan repayments = less consumption |
| Changes to confidence levels | - The stronger the economy, the higher consumer confidence - Consumers feel secure in their jobs and are confident of receiving regular salary payments, so consumption increases - In a weakening or recessionary economy, consumer **confidence **falls - Consumers feel less secure in their jobs and consumption decreases |
| Changes to age distribution | - Refers to the proportion of people in different age groups within the population - Young populations → Higher spending on education, leisure, and starter homes; lower savings - Ageing populations → More spending on healthcare and pensions; possibly less spending on consumer goods - Can influence the types of products and services in demand and the level of overall consumption in the economy - E.g.**** Japan’s ageing population leads to higher demand for healthcare services and elderly care facilities, while youth-oriented markets are smaller |
| The culture of the country | - Culture refers to the shared values, beliefs, and traditions of a society - Cultural attitudes towards saving vs. spending directly affect consumption patterns - In cultures where saving is prioritised (e.g. many East Asian countries), households may spend less of their disposable income - In cultures with a strong consumerism trend, households are more likely to spend on non‑essential goods and services - E.g. In the USA, cultural emphasis on consumer spending drives high levels of credit card use; Germany’s culture encourages saving, leading to lower household debt |
The influences on saving
Spec point — Influences on saving
- Disposable income can either be saved or spent on goods/services (consumption)
What influences saving in an economy?
| Influence | Explanation |
|---|---|
| Changes to income | - Higher disposable income allows households to save more after covering essential expenses - Lower disposable income means less money available for saving - E.g. A salary increase enables a family to deposit more into a savings account each month |
| Changes to interest rates | - Higher interest rates encourage saving because the return on savings is greater - Lower interest rates discourage saving as returns are smaller, making spending more attractive |
| Changes to confidence levels | - High consumer confidence → households may save less and spend more - Low confidence (e.g. during a recession) → households may increase saving as a precaution (precautionary saving) |
| Changes to age distribution | - Younger people often save less and prioritise spending on education, housing and leisure - Middle‑aged individuals may save more for retirement - Retired individuals might reduce saving and draw on past savings |
| The culture of the country | - Cultures that value saving (e.g. Japan, Germany) → higher proportion of income saved - Consumption‑oriented cultures → lower savings rates |
The influences on borrowing
Spec point — Influences on borrowing
-
Households borrow money from friends, relatives, money lenders and commercial banks
-
Commercial banks usually require security in order to extend a loan
- The need for security often prevents low-income households from accessing bank loans at competitive rates
What influences borrowing in an economy?
| Influence | Explanation |
|---|---|
| Changes to income | - Higher disposable income increases ability to borrow because lenders see borrowers as lower risk and repayments are more affordable - Lower disposable income reduces ability to borrow, as repayments may be harder to meet - E.g. A pay rise may make it easier for a household to qualify for a mortgage |
| Changes to interest rates | - Higher interest rates discourage borrowing because the cost of repaying loans is greater - Lower interest rates encourage borrowing as repayments are cheaper - E.g. Lower mortgage rates may lead to more people taking out home loans |
| Changes to confidence levels | - High consumer confidence → more borrowing as households feel secure in their income and future job prospects - Low confidence(e.g. during a recession) → less borrowing as households fear they may not meet repayments |
| Changes to age distribution | - Younger people may borrow more for education, housing or setting up homes - Middle‑aged individuals may borrow for business expansion or large purchases - Older individuals may borrow less due to lower income in retirement and reduced access to credit |
| The culture of the country | - In cultures where borrowing is socially acceptable and credit is widely available (e.g. USA), borrowing levels tend to be higher - In cultures that value debt‑avoidance and financial prudence, borrowing is less common |
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