Personal Consumption

Abstract

Since over 60% of gross domestic product is accounted for by personal consumption, and since the structure of expenditures plays a crucial role in the determination of the balance of the economy, the modelling of consumers’ expenditures is at the very centre of the model. This chapter discusses the way in which personal disposable income is allocated between saving and consumption and how the latter is disaggregated into over forty categories of expenditure. Much of the discussion duplicates material already published in Number 1 of this Series, (Deaton, 1975a), which contains a full treatment of the methodology and practice of disaggregated demand analysis. Consequently, the reader whose main interest lies in consumption analysis, and in the details of parameter estimates should refer to that source. However, given the importance of consumption in the model, this chapter attempts to present a self-contained, albeit condensed, statement of how consumers’ expenditures are determined. There are also a number of points at which the present treatment diverges from that of the earlier volume. In this book, the coverage is extended to include durable goods, and the whole consumption sector is fully integrated into the complete balanced model for 1980, so that the actual projections differ from those in Chapter 8 of Deaton (1975a) to the extent that incomes and relative prices are not the same. On the negative side, many of the problems discussed in the previous volume are still apparent; we are some way from having an ideal model for demand analysis.