Cambridge IGCSE Economics 0455
Syllabus points
- Explain the influences on spending, saving and borrowing.
- Explain how these differ between people on different incomes.
What households do with income
Households can spend, save or borrow. The balance between these depends mainly on income, but also on interest rates, confidence and needs.
- Spending (consumption) — buying goods and services now.
- Saving — income not spent, set aside for the future.
- Borrowing — spending more than current income by taking on debt.
Key definitions
| Term | Definition |
|---|---|
| Consumption | Household spending on goods and services. |
| Saving | The part of income that is not spent. |
| Borrowing | Taking on debt to spend beyond current income. |
Influences on spending, saving and borrowing
- Income — the biggest influence. As income rises, both spending and saving usually rise.
- Interest rates — higher rates reward saving and make borrowing dearer, so saving rises and borrowing falls.
- Confidence — if people expect good times, they spend and borrow more; if they fear job loss, they save more.
- Age and needs — young people may borrow (education, first home); older people may save for retirement.
Differences by income level
- Low-income households spend a high proportion of income on necessities and save little; they may need to borrow.
- High-income households can afford necessities easily, so they save a larger proportion and spend more on luxuries.
The lower the income, the higher the share spent on necessities and the lower the share saved.
Worked example
When the central bank raises interest rates, a household with a mortgage faces higher repayments, so it cuts back on spending and saves more. A low-income family, already spending nearly all its income on essentials, has little room to change and may struggle with any borrowing costs — showing how the same policy affects households differently.
Common exam mistakes
- Saying higher interest rates always cut saving — they usually *raise* it.
- Forgetting that low-income households spend a higher *proportion* on necessities.
Exam technique
Link household decisions to interest rates and confidence, and explain why the effects differ across income groups.
Quick revision
- Households spend, save or borrow.
- Influences: income, interest rates, confidence, age.
- Low income → high spending share on necessities, low saving.