ESTIMATION OF AGGREGATE CONSUMPTION FUNCTION FOR HIGH INCOME COUNTRIES

Abstract

Aggregate Real Private Consumption (ARPC) is one of the major components of the Gross Domestic Product (GDP) that contributes to specify any economy’s long term living standards. The contribution of ARPC stands on average around 55%. It is therefore important to understand the components of consumption, which is almost more than half of the aggregate economic expenditure. The study is an attempt to make a case for developing countries to bring policy level changes in order to determine the consumption pattern of developing countries’ GDP. Using an appropriate empirical model, the study investigates the validity of Permanent Income Hypothesis (PIH) and Absolute Income Hypothesis (AIH) on ARPC for selected developed economies. The results of the study reveal that the important determinants of ARPC in the long-run are real GDP and wealth, while in the short-run they are real interest rate and unemployment rate.