Absolute value and diversity of household spending: analysis on International Comparison Program (ICP) 2011 data

Denys Verba,Alevtyna Kudinova

doi:10.24136/eq.2019.005

Abstract

Research background: This article investigates the connection between consumer?s budget growth and diversification of household spending. The main question of research is ?are there new drivers of modern processes of consumer spending's diversification, at a time when spending on food has reached the minimum share in the consumer budget. Purpose of the article: The objective of the article is to clarify the hypothesis about the existence of a certain limit of income (and consumer spending) after which the growing of consumer?s purchasing capacity loses power of influence on spending diversity. Methods: Theil entropy index was used for measuring the diversity of household spending. This index was defined as a sum of within-group and between-group entropy, which allows for comparing the diversification of household spending in two aggregate groups of expenditure, which were formed by the authors. The Workings? equation was used for modeling the spending entropy?s dependence on their absolute value. Two categories of household spending were regrouped (consolidated) by us through forming a group more related to the development of human economic potential (SMRHD) and less related to these processes (SLRHD). The research was done on the basis of ICP (2011) data, which covers 178 countries and refers to 2011 year ? the latest available on the moment of the article was completed. Findings & Value added: The results obtained in this research confirmed that there is a limit of household spending?s size, beyond which further increasing of consumers? economic opportunities loses a significant impact on the diversity of consumption spending. However, the weakening of the link between size of spending and its entropy reflects impact of two qualitative differenced factors. The first is relatively much more radical decrease of spending growth influence on within-group entropy for SLRHD. The second ? is relatively much less significant decrease of entropy?s sensitivity to spending growth for SMRHD. Such results reflect the increase in the importance of "non-functional demand components", which reduces the capacity of data on functional distribution of household expenditures to characterize the extent of their diversification.

Highlights

In recent literature, devoted to analysis and comparing of national consumption patterns, the income and relative price are considered to be themain factors of consumer’s spending structure
We tend to hypothesize that the diversification of consumption patterns with rising incomes and consumer spending has continued, keeping the full range of social consequences, statistics about the structure of consumer spending by functional classification are not able to show the degree of consumption diversification
The results obtained in this research confirmed that there is a limit of household spending’s size, beyond which further increasing of consumers’ economic opportunities at least loses a significant impact on the diversity of consumption patterns

Summary

Introduction

In recent literature, devoted to analysis and comparing of national consumption patterns, the income and relative price are considered to be themain factors of consumer’s spending structure. Several trends are associated with increasing income (Engel’s law in ‘strong’ and weak formulations, decline of own and cross price elasticity of demand on wide defined categories of goods etc.). Among these trends, there is the following: ‘Households tend to diversify their spending across a wide range of goods and services as they become more affluent’ (Chai et al, 2014). There is the following: ‘Households tend to diversify their spending across a wide range of goods and services as they become more affluent’ (Chai et al, 2014) Such diversification is associated with extension of consumer’s choice and enhancement of consumer’s well-being. Will the social consequences of consumption diversification remain unchanged in countries where reduction of the food share has lost impact on equalization of consumer spending proportions? Are there new drivers of modern processes of consumer spending's diversification which require updating approaches to investigating the dependence of "revenue growth — changes on national consumption patterns"?

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