The Estimation ofAggregate Consumption Function for High Income Countries

Abstract

<span>Aggregate Real Private Consumption (ARPC) is one of the major components of the Gross <span>Domestic Product (GDP)that contributes to specify any economy’s long term living standards. The <span>contribution of ARPC stands on an average around 55%. It is therefore important to understand the <span>components of the consumption which is almost more than half of the aggregate economic expenditure. <span>The study is an attempt to make a case for developing countries to bring policy level changes in order to <span>determine the consumption pattern of developing countries’ GDP. Using appropriate empirical model the <span>study investigates the validity of Permanent Income Hypothesis (PIH) and Absolute Income Hypothesis <span>(AIH)on ARPC for selected developed economies. The results of the study reveals that the important <span>determinants of ARPC in the long-run are real GDP and wealth, while in the short-run they are real <span>interest rate and unemployment rate.</span></span></span></span></span></span></span></span></span><br /><br class="Apple-interchange-newline" /></span>

Estimation of Consumption Functions Using Savings Motive Hypothesis (SMH)

“…Meanwhile, in the long-run, values of MPC out of the real GDP for Australia, Korea, New Zealand, and Singapore are 0.579, 0.640, 0.650, and 0.629, respectively, implying that a 1% increase in real GDP would cause consumption to increase by 0.579, 0.640, 0.657 and 0.629 respectively (Ahmed et al, 2015). These results are very close to the value of the global MPC constant estimate of 0.66.…”

“…Meanwhile, the average propensity to consume (APC) is the fraction of income devoted to consumption. According to Keynes, for every increase in income, the APC declines (Ahmed et al, 2015).…”

“…The author gratefully acknowledges the assistance of International Economic Review for publication of this paper for free. habits of individuals and the principles on which income is divided between them" (Ahmed et al, 2015). Many hypotheses have been advanced to explain the relationship between consumption and income.…”

Nexus between Consumption, Income and Price Changes: Asymmetric Evidence from NARDL Mode

“…Furthermore, the past research paid attention to older methodologies that did not consistently provide reliable findings. Ahmed et al (2015) used an Autoregressive distributed lag approach to estimate the absolute income hypothesis (AIH) and permanent income hypothesis (PIH) in Korea, Singapore, Australia, and New Zealand. They concluded that unemployment and interest rates have significant short-run impacts on household consumption, but wealth and income possess considerable long-run effects.…”