The Relationship between Income, Consumption and GDP: A Time Series, Cross-Country Analysis

Abstract

This paper attempts to investigate the co-integration relationship between consumption, income and GDP per capita (as a proxy of the level of standard of living) in time-series cross-section data. To conduct this analysis, we have applied tests to verify if the time series are non-stationary and co-integrated. The panel data covers a large sample formed from 79 countries, divided in three categories depending on their income level – low, middle and high. The study regarded annual observations for a period of 31 years, from 1980 to 2010. The results have shown that the association between consumption and income is stronger in low and high income countries, compared with middle income countries. A small level of income determines its use especially for consumption and a high level of income increases consumption as there are more available resources to cover large investments as well. The relation between consumption, income and GDP is stronger for low and middle income countries, a logical conclusion since the high income countries allocate more capital to investments and are intense specialized in research and development activities.