Ch. 10: Consumption & Savings

1. Ch. 10: Consumption & Savings Gr. 11 Economics (CIE3M1-01) M. Nicholson

2. Consumption • Consumption is that part of an individual’s income that is spent on goods & services rather than saved. • Consumer demand determines what goods & services are produced

3. Consumption • Factors influencing consumer choice • Income levels • Fashion • Custom • Advertising

4. Consumption • Consumer protection  Goods and services much more complex than in the past, therefore vulnerable consumers need to be protected by: • Government • Better Business Groups • Consumer Protection Groups

5. Consumption • Consumer credit • The ability to buy now and pay later • Other sources of credit include bills we receive and pay well after we have used the product (e.g. hydro, telephone) • Credit cards such as Visa and MasterCard are very popular, but unpaid balances have punitive interest payments of 18.5 %

6. Consumption • Consumer credit • Charge accounts like a Sears card are growing less popular as they become credit cards (e.g. Canadian Tire) • Conditional sales contracts are installment payments that if not paid allow the seller to repossess the product sold

7. Consumption • Spending patterns of Canadians • incomes ↑  expenditures ↑ < savings ↑ • expenditures as a percentage of income decrease as income rises • e.g. spend $12,000 of a $12,000 income which is 100% whereas spend $40,000 of a $60,000 income which is 66%

8. Consumption • Personal finances • Good idea to develop a budget or financial plan showing expected income & expenditures • it helps control your consumption to avoid debt caused by poor purchasing decisions

9. Savings • Savings are that part of current income that is not spent • Loans • Banks, trust companies, and credit unions borrow money from individual Canadians (e.g. personal chequing account, chequing / savings account, savings account, guaranteed investment certificates)

10. Savings • Loans • Governments borrow money through savings bonds (e.g. Canada Savings Bonds) • Life insurance savings • Corporate bonds

11. Savings • Equities • Stocks or ownership in a corporation offer a high return, but risk of losing investment can be high • Real estate offers homeowner’s equity, the difference between the value of the house and outstanding loans plus there is no capital gains tax on the increased price a home seller may receive

12. Savings • Mutual / Investment Funds • Safer investment because of diversification and professional management • E.g. equity funds, bond funds, mortgage funds, money market funds, balanced funds

13. Savings • Life Insurance • A contract in which one party (the insurer) agrees to pay another (the insured) a sum of money in the event of a specific loss (e.g. death) • Term insurance, Straight-life / Whole-life insurance, Limited-pay life insurance

14. Savings • Share ownership among Canadians • image of Canadians being very conservative and adverse to risk • ownership of stocks ↑  16% to 21 % of the population between 1989-93 • 25 % own equity funds

15. Savings • Registered Retirement Savings Plans • Method of reducing taxable income and saving for retirement • You and your investments • Decide on reasonable financial objectives (e.g. 3 bedroom house, minivan, Florida vacation) • greater risk = greater potential returns • less risk = less potential returns

16. Savings • You and your investments • Income large enough? • Future income? • Age? • Time, interest, knowledge in investments? • Tax situation? • Risk tolerance?