Consumption, household debt and its impact on the UK economy
Debt has been rising as a proportion of income. Households have been getting into greater debt, with consumption helping to underpin growth of GDP. Fundamental to macroeconomics is the formula for aggregate demand (AD).
AD = C + I + G + (X-M)
Consumption (C) is approximately 60% of AD. An empirical understanding of consumption is important in analysing the economy.
Listen to this programme from 2015 on household debt. In 2015 UK household debt as a proportion of disposable income was 150%.
Read the following article:
Between 2012 and 2017 household debt increased by 7%. Unsecured debt, car finance and student debt has soared.
Information from the above wider reading can be applied to a number of questions, for example:
To what extent are economic crises always preceded by large increases in household debt?
Consider the following question:
To what extent will higher inflation impact on the UK economy?
This has been colour coded to show where the skills of application, analysis and evaluation come from.
Practice writing a paragraph to support one impact on the UK economy. This has been colour coded to show how to pick up marks for all assessment objectives within a paragraph.
In October 2017 the inflation rate rose to 3.1%, due to increases in cost push inflation, as the lower value of the £ increased costs for UK businesses. This was above the UK Government’s central target of 2%. Therefore, the MPC, looking to dampen inflationary pressure, raised interest rates from 0.25%, which was historically low. This is likely to lead to a fall in consumption, approximately 60% of AD, therefore significant to the UK economy. This is because borrowing costs have gone up, with household borrowing over £1.6tn, the highest it has been since the recession of 2007/08. Therefore, consumer spending will decrease, leading to a fall in aggregate demand. This is evidenced by the UK’s low economic growth figures of 1.4% in 2017. This was a significant fall from 2.2% for 2016. This can be illustrated using ADAS analysis ….
Always try to support your argument with a relevant diagram.