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Consumer Credit in the UK - Essay Example

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Consumer Credit in the UK

(Guardia, 2000). Consumer credit does not need a guarantee and the tax provisions covering this type of lending differ from those pertinent to mortgage credit.
The circular flow diagram is very helpful in understanding Britain's consumer debt. The circular flow diagram enables one to understand macroeconomics. Goods and services and resources flow through the economy in one direction. The money flows through the economy in the opposite direction. Money is exchanged for specific goods and services which the households purchase regularly.
Another important aspect of the circular flow is the presence of the three main factors of production in the economy fall under these categories: labor, land, and capital. Wages reflect the price of labor. Rent reflects the price of land. Profit is the price for capital. Businesses in the economy are expected to generate profits. Workers who work in these businesses are paid in wages. Then the persons who utilize land for their businesses pay a fixed rent.
The circular flow shows that the households (composed of family members), in the circular flow, own all the labor, land and capital. In markets for factors of production, households sell the services of labor, land and capital to firms in exchange for wages, rent and profit.
Then in the area of consumer credit, the households borrow...
Then after a designated period of repayment, the households pay the loans plus the interest charges from the wages they derive from the sale of their labor services to the firms and the profits they derived from their businesses in the economy. (See Figure 1: Circular Flow Diagram).
Then the households spend their income on products and services that are produced by firms. The money spent on goods and services is called spending (by households) and income (by firms), but spending and income are of the same number. In effect, the households (family members) have two specific functions in the economy. First, they sell their labor, land and capital to firms in order to make income, and second, they spend their income on the goods and services that firms produce.
Similarly, firms or companies also play two important roles in the economy. First, they purchase the services of labor, land and capital, and second, they use labor, land and capital to produce goods and services, which they sell to households.
Technology enters the circular flow diagram as shown by a firm's ability to transform labor, land and capital into goods and services. When firms can generate more goods and services compared to the previous period while using the same level of labor, land and capital, then, the economists contend that the technology has improved.

Figure 1: Circular Flow Diagram

Comparison of British and German consumer credit
Consumer spending in the UK was fueled by economic growth, consistent prosperity, low interest rates, low inflation rates, record employment figures and healthy fiscal revenues by the UK government. However, a new trend has emerged. UK consumers are beginning to get higher ...Show more


The credit extended to the private sector is defined as the total lending to households and private businesses to implement business transactions. Credit to the household sector consists of consumer credit and mortgage credit. Consumer credit constitutes loans granted for a specific purpose and credit granted for a general use (Balaguy, 1996).
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