2022/29 LEM Working Paper Series

Quantifying Expenditure Hierarchies and the Expansion of Global Consumption Diversity

Andreas Chai, Elena Stepanova and Alessio Moneta
Spending diversity; economic development; income elasticity; economic complexity.

  JEL Classifications
D12, D83, J15, O12
Economic growth tends to stimulate fundamental changes in consumption patterns as consumers who get rich tend to spread their spending more evenly across a wider variety of goods and services. Comparing cross sectional spending patterns across rich and poor countries, we investigate how this diversification process enables more niche patterns of spending to emerge across the global population of consumers. We use entropy measures to quantify the dispersion of household spending across goods and study how it unfolds as GDP rises. Using a gravity model to study international differences in the relative order of income elasticities, i.e. expenditure hierarchies, we show how this diversification process on the national level is correlated with cultural norms, GDP and income inequality. We find that national expenditure hierarchies are relatively similar across countries among necessities, while they are increasingly unique among luxuries. We further verify how rising affluence tends to generate more niche consumption patterns by examining how rising income is positively correlated with demand heterogeneity and income inequality is negatively correlated with market depth.
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