The Economics of Global Consumption Patterns

Article excerpt

Henri Theil devoted a good deal of the last two decades of his professional activities to the analysis of international consumption patterns. This paper commences with a review of Theil's path-breaking research on cross-country demand, and then investigates in some detail two important issues: (i) the extent to which differences in incomes and prices explain international consumption patterns; and (ii) new empirical evidence regarding the extent to which tastes are similar internationally. The paper also contains an evaluation of another important building block of Theil's work in this area, that of the assumption of preference independence, whereby there are no interactions between goods in the utility function.

Key Words: cross-country demand, preference independence, system-wide approach

Henri Theil was one of the pioneers of the system-wide approach to demand analysis in which the consumption of all n goods in the budget is explained jointly. This work was characterized by much creativity and an appealing blend of theory and measurement. His early work in this area analyzed issues associated with the quality of consumption and ways of measuring substitutability/complimentary relations with cross-sectional data (Theil 1952; Theil and Neudecker). But it was Theil's work in later decades that became even more influential and has had a lasting effect. This later work included the introduction of the famous Rotterdam model, which Theil developed in conjunction with Barten (Barten 1964; Theil 1965). For the first time, this model allowed rigorous testing of the major hypotheses of consumer demand theory. The major reference for this work is the two-volume book, Theory and Measurement of Consumer Demand (Theil 1975/1976), which includes an in-depth treatment of the economic theory of the consumer, index numbers, aggregation over individuals, the econometrics of demand systems, conditional demand models, summary measures of the consumer's basket, extensive empirical applications, and much more. A rereading of that book is highly rewarding because it reveals amazing insights, originality, and attention to data, and it serves as a reminder of just how high were Theil's scholarly standards.

A further major contribution of Theil was cross-country demand analysis, whereby systems of demand equations were estimated with data from different countries. The availability of the Kravis, Heston, and Summers data was an important stimulus to this strand of research. The assumption of this work was that tastes were the same in different countries, at least as a working hypothesis. The assumption that tastes are always constant is a major tenant of Chicago economics and has been long championed by leading lights such as Becker, Friedman, and Stigler (Freidman; Stigler and Becker). Given that Theil was at The University of Chicago when he initiated his cross-country research, it is interesting to speculate about the influence that this institution played in shaping his research. For someone with the strongest of personalities and someone who did not always identify overtly with the Chicago School, was the force of Chicago economics sufficiently strong to influence, perhaps only subconsciously, Theil's thinking about tastes in different countries?

This paper commences with a review of Theil's pathbreaking research on cross-country demand analysis and then investigates in some detail two important issues. First, we analyze the extent to which differences in incomes and prices explain international consumption patterns; second, we provide new empirical evidence regarding the extent to which tastes are similar internationally. We also discuss another important building block of Theil's work in this area-the assumption of preference independence whereby there are no interactions between goods in the consumer utility function. The structure of the paper is as follows. First, we provide an account of Theil's work on the Rotterdam model and its cross-country extensions. …