Introduction individuals get. It is a product of

Introduction

Trade involves the supply of goods and services. For trade to be facilitated there must be a supply and a demand of goods and services. The amount of resources that individual and firms are willing and are able to commit in buying of goods and services produced in the economy are called consumer consumption. It takes two angles, from a micro economics point where there is consideration of individuals and firms and from a macro economics when the entire society is considered. The remains after consumption is the saving that an economy, individuals, or firms will save (Carrick 33). This paper analyses the effects that tax cut can have on consumption and investment.

Consumption V/S Savings

The amount of income that a consumer gets at one particular point can be put in different use. It can be consumed or it can be saved. Income is the total amount of resources that individuals get. It is a product of all earnings. The following equation shows the elements of income (I); I = savings(S) + consumptions (C) I = S + C Savings are utilized in various ways with the most common one being for investing in various projects of the economy.

So; Savings (S) = Investments (I) S=I At constant income, if consumption increases, then savings will reduce and the rate of investments in the country will reduce. On the other hand, if consumption decreases, there is an increase in investments. When an income of individual or firm increases, the effect on investment is dependent on the marginal rate to consume; if an increase leads to a proportionate increase in consumption, then the effect is the same to investment (Mishkin 12) The diagram below show the connection between saving rate and consumer spending

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Factors affecting consumer consumption

There are different factors which affect the rate of consumption of an individual or firms; they include taxation, government expenditure, state of the economy and future expectations of the individual or firm. The following table shows the rate of expenditure between 2005 and 2008, in United States;

Rate of change

Item200520062007Annual expenditures………………………………………………..$46,409$48,398$49,6382.6Food ……………………………………………………………………5,9316,1116,1330.4At home3,2973,4173,4651.4Cereals and bakery products……………………………….4454464603.1Meats, poultry, fish, and eggs………………………………764797777-2.5Dairy products …………………………………………………..3783683875.2Fruits and vegetables …………………………………………5525926001.4Other food at home…………………………………………….1,1581,2121,2412.4Away from home………………………………………………….2,6342,6942,668-1.0Alcoholic beverages……………………………………………….426497457-8.0Housing ……………………………………………………………….15,16716,36616,9203.4Shelter ……………………………………………………………….8,8059,67310,0233.6Utilities, fuels, and public services………………………….3,1833,3973,4772.4Household operations…………………………………………..8019489843.8Housekeeping supplies ………………………………………..611640639-0.2House furnishings and equipment………………………….1,76717081,7975.2Apparel and services ……………………………………………..1,8861,8741,8810.4Transportation……………………………………………………….8,3448,5088,7582.9Vehicle purchases (net outlay) ………………………………3,5443,4213,244-5.2Gasoline and motor oil………………………………………….2,0132,2272,3847.0Other vehicle expenses………………………………………..2,3392,3552,59210.1Public transportation…………………………………………….4485055386.5Health care …………………………………………………………..2,6642,7662,8533.1Entertainment ……………………………………………………….2,3882,3762,69813.6Personal care products and services ……………………….5415855880.5Reading ……………………………………………………………….1261171180.9Education……………………………………………………………..9408889456.4Tobacco products and smoking supplies…………………..319327323-1.2Miscellaneous……………………………………………………….808846808-4.5Cash contributions…………………………………………………1,6631,8691,821-2.6Personal insurance and pensions ……………………………5,2045,2705,3361.3Life and other personal insurance ………………………….381322309-4.0Pensions and Social Security………….4,8234,9485,0271.6

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