Understanding Macroeconomics: Consumption, Savings, and Aggregate Demand

Functioning of the Economy Overall

The set of macroeconomic objectives can be summarized in one: to achieve a growth rate of the economy that satisfies needs more and more, ensuring full employment of resources and maintaining stable prices.

An Overall View

• The internal forces of the market: changes in population, consumer behavior and investment, and technological innovation.
• The external shocks: political and military conflicts between countries, droughts, and natural disasters.
• The performance of governments to direct and control the economy through fiscal policy, monetary policy, and external policy.

Aggregate Demand and GDP

The forecast cost of a global economy is known as aggregate demand because it is an aggregation or sum of the demand for expenditure of all sectors of the economy. It is the sum of expectations of consumer spending and private consumption (C), the expectations of business investment (I) or consumption, expenditure projections published by the Government (G), and the balance to be obtained as the difference of our exports (X) and imports (M) with the rest of the world:

DA = C + I + G + (X-M)

Excluding foreign relations (net exports) gives the domestic demand:

Domestic demand = C + I + G

Consumption and Saving

In macroeconomics, consumption is the total expenditure incurred by households on goods and services in a given period, including both durable and nondurable goods.

What Consumption Depends On

• Families' disposable income: As disposable income grows, consumption increases. It is important to note that permanent income, which is the average income over a lifetime, is as important as current income.
• Interest rates and the availability of credit: Many purchases are made with loans. If interest rates fall, it is cheaper to borrow, which encourages consumption.
• The life cycle of people: The young and the elderly are more likely to spend their income than people in middle age.

Savings

• Ensuring protection against possible situations like illness or unemployment.
• The ability to carry out projects that require significant expenditures.
• Getting additional income by investing the savings.

The Marginal Propensity to Consume

The amount by which consumption increases with increasing disposable income in the euro is called the marginal propensity to consume (MPC). The increased level of savings arising from an additional euro of income is called the marginal propensity to save (MPS).

MPC + MPS = 1