Convergence Analysis of Households' Consumption Expenditure: A Cross Country Study

Convergence Analysis of Households' Consumption Expenditure: A Cross Country Study

Ramesh Chandra Das (Katwa College, India), Amaresh Das (Southern University at New Orleans, USA) and Frank Martin (Southern University at New Orleans, USA)
DOI: 10.4018/978-1-5225-0215-9.ch001
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Abstract

Households' consumption expenditure becomes an important determinant of GDP of a country, particularly when the economy is struck by depression with low levels of private and public investments. So maintaining growth of this head of expenditure over time becomes the crucial agenda of the policy makers all over the world. The present chapter tries to analyze whether the developing countries' levels of households' consumption expenditure are converging to the ones in the developed countries during 1980-2013 in the sample of 40 countries. The study reveals that there is no significant absolute ß and s convergence among either in the cross section or in pooling of the data during the given period. But population growth factor is making the countries converge significantly in conditional sense. By separating the entire data we observe that, for the entire period, the developed countries are significantly converging in absolute sense while the developing countries are not, although there are mixed results in s convergence.
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Introduction

The post neoclassical economic thought is strongly engaged in the determination of the national output and employment under the system of effective aggregate demand where there is a general excess supply of goods and services. Aggregate demand side output is generated by the volume of aggregate consumption expenditure of four economic agents, viz. households, firms, government and international consumers. Households’ aggregate consumption expenditure becomes one of the major determinants of aggregate national output particularly in a closed economy without the public sector. We observe since the aftermath of World War II that starting from the pertinent differences among the developed and backward countries the economies of poor nations are growing over time with their potential domestic markets and trying to catch up with the so called developed nations through opening up of their economies to the world markets. Besides, the so called developed economies have been hit hard by several economic and political shocks till date and to get rid of them they have been trying to rely upon the economies of the so called poor nations. In other way to state that there have been strong emergence of a few nations particularly from the Asian and Latin American Zones who have been chasing the base GDP levels of the developed countries by growing at a faster rates compared to the developed ones and trying to become the part and parcel of world governing communities.

To catch up with the advanced economies, one of the simplest ways for the backward ones is to run through the free flow of goods and services across the borders as is happening now in Globalization. Globalization can be made possible by liberalizing the domestic economies through lifting trade restrictions on the flow of goods and services. In the short run, the effect of globalization falls directly on the prices of goods and services traded then it affects the income levels of all the globalized countries. In the long run it leads to homogenization of tastes and preferences across the economies along with homogeneity of cross economy cultures and social practices. Globalization, in that case, becomes truly fruitful and the world then becomes a global village with all the countries become homogeneous representative units in the unionized umbrella. When the process of globalization works the low and middle income countries get access to new dreams that enable them to grow at a faster rates than that under autarchy position and the so called high income countries of the west also get access to the disposal of their produced technology oriented capital goods to the avenues of the middle and low income countries and try to reach to their next better levels. In other way to say that there is always a better chance of the backward nations to grow at higher rates than the advanced nations. This process is known as the Convergence across the world economies as proposed by the neoclassical economists like Solow (1956), Barro and Sala-i-Martin (1992), Mankiw, Romer and Weil (1992), Friedman (1992), Quah (1993), etc.

Key Terms in this Chapter

Absolute ß Convergence: It means the inverse relation between the annual average growth rates of the variable and the base value of the variable. If the coefficient is significantly negative then we call that the regions or countries are converging in absolute terms with no effect of the conditional variables. All the countries then converge to a common steady state position. For further detail see the methodology section.

? Convergence: The existing literatures show that s convergence is not even general. Hence a more general approach of testing ß convergence is the rank concordance index which is also known as ? convergence. If the trend of rank concordance tends to zero it means the economies are getting closer and closer and if it instead tends to unity there arises the possibility of extreme inequality.

Consumption Expenditure: Consumption expenditure of households is the market value of all goods and services, including durable products (such as cars, washing machines, and home computers). It excludes purchases of dwellings but includes imputed rent for owner-occupied dwellings. Households’ consumption expenditure is made out of the disposable income which is again derived by the deduction of personal tax from the personal income. Usually disposable income is the main determinant of consumption expenditure besides the level of wealth or assets, interest rates, inflation, consumers’ sentiment about the economy and other behavioral factors.

Developed Countries: The status of a country can be judged by different criterion involving economic, political and social parameters. One such criterion is income per capita. A country with high gross domestic product per capita can be described as developed. Another economic criterion is industrialization; a country in which the growth and share of tertiary and quaternary sectors of industry dominate can also be described as developed. The list of countries included in the list of developed or high incomes countries of the study are borrowed from the classification of the World Bank and the International Monetary Fund.

Conditional ß Convergence: Sometimes it happens that countries or regions differ in their steady state values to which they want to converge. It arises when there are some conditional variables start to work which are mainly the structural variables. If each economy tends to converge to its own steady states not to common steady states then it is called conditional convergence. In such a situation a vector of other explanatory variables play the role of determining growth rates besides the base value of the variable.

Regression: It is a method of projection of a dependent variable for a specific value of an independent variable. If y is dependent and x is independent variables with y* and x* as their mean values then the equation (y-y*) = b yx (x-x*) is called Regression Equation of y on x, where b yx is known as regression coefficient determined by variances of y and x and correlation coefficient. On the other hand the regression equation of x on y will be (x-x*) = b xy (y-y*), where b xy stands for the regression coefficient of x on y.

Developing Countries: A developing country, also called a lower developed country with middle and low income base, is a nation with an underdeveloped industrial base, and low Human Development Index (HDI) relative to other countries. On the other hand, since the late 1990s developing countries tended to demonstrate higher growth rates than the developed ones. According to the UN, a developing country is a country with a relatively low standard of living, undeveloped industrial base, and moderate to low Human Development Index (HDI). A list of countries out of the developing club are presently chasing the GDP of the top developed country, although are lacking in terms of other social and political factors.

s Convergence: Whether the countries are converging to a common steady state or individual steady states, there may be the instance that the inter country dispersion or coefficient of variation is falling over time. If it happens then it is called s convergence. It is a very general phenomenon compared to the ß convergence. In this sense, it is stated that the latter is necessary but the former is sufficient.

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