2022/29 | LEM Working Paper Series | ||||||||||||||||
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Quantifying Expenditure Hierarchies and the Expansion of Global Consumption Diversity |
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Andreas Chai, Elena Stepanova and Alessio Moneta |
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Keywords | |||||||||||||||||
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Spending diversity; economic development; income elasticity; economic complexity.
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JEL Classifications | |||||||||||||||||
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D12, D83, J15, O12
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Abstract | |||||||||||||||||
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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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