Absolute value and diversity of household spending: analysis on International Comparison Program (ICP) 2011 data

Keywords: household spending, entropy of consumption basket, consumption patterns, consumer choice, grouping of household spending categories

Abstract

Research background: This article investigates the connection between consumer’s budget growth and diversification of household spending. The main question of research is “are there new drivers of modern processes of consumer spending's diversification, at a time when spending on food has reached the minimum share in the consumer budget.

Purpose of the article: The objective of the article is to clarify the hypothesis about the existence of a certain limit of income (and consumer spending) after which the growing of consumer’s purchasing capacity loses power of influence on spending diversity.

Methods: Theil entropy index was used for measuring the diversity of household spending. This index was defined as a sum of within-group and between-group entropy, which allows for comparing the diversification of household spending in two aggregate groups of expenditure, which were formed by the authors. The Workings’ equation was used for modeling the spending entropy’s dependence on their absolute value. Two categories of household spending were regrouped (consolidated) by us through forming a group more related to the development of human economic potential (SMRHD) and less related to these processes (SLRHD). The research was done on the basis of ICP (2011) data, which covers 178 countries and refers to 2011 year — the latest available on the moment of the article was completed.

Findings & Value added: The results obtained in this research confirmed that there is a limit of household spending’s size, beyond which further increasing of consumers’ economic opportunities loses a significant impact on the diversity of consumption spending. However, the weakening of the link between size of spending and its entropy reflects impact of two qualitative differenced factors. The first is relatively much more radical decrease of spending growth influence on within-group entropy for SLRHD. The second — is relatively much less significant decrease of entropy’s sensitivity to spending growth for SMRHD. Such results reflect the increase in the importance of "non-functional demand components", which reduces the capacity of data on functional distribution of household expenditures to characterize the extent of their diversification.

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Published
2019-03-31
How to Cite
Verba, D., & Kudinova, A. (2019). Absolute value and diversity of household spending: analysis on International Comparison Program (ICP) 2011 data. Equilibrium. Quarterly Journal of Economics and Economic Policy, 14(1), 99-127. https://doi.org/10.24136/eq.2019.005
Section
Articles