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Quality, quantity, spending and prices

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  • Clements, Kenneth W.
  • Gao, Grace

Abstract

One measure of the change in the “quality” of consumption is the degree to which the consumption basket as a whole moves towards more luxurious goods, away from necessities. We introduce two related measures based on the luxury/necessity distinction. One is an index of the extent to which the prices of luxuries change as compared to necessities, while the second indexes the change in spending. These two measures are interpreted as the price of and spending on quality. The “volume” of quality is then spending deflated by its price. Using the recent International Comparison Program data for 100+ countries, we find that, on average, quality increases with income, but at a slower rate; luxuries are relatively more expensive in richer countries, necessities cheaper; and approximately 75 percent of additional spending on quality flows into a volume component, with the remaining 25 percent accounted for by prices.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 56 (2012)
Issue (Month): 7 ()
Pages: 1376-1391

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Handle: RePEc:eee:eecrev:v:56:y:2012:i:7:p:1376-1391

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Keywords: Quality; Indexes; Consumer demand;

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References

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  1. Kenneth W Clements & Grace Gao, 2011. "Quality, Quantity, Spending and Prices," Economics Discussion / Working Papers 11-12, The University of Western Australia, Department of Economics.
  2. Ernst R. Berndt & Neal J. Rappaport, 2001. "Price and Quality of Desktop and Mobile Personal Computers: A Quarter-Century Historical Overview," American Economic Review, American Economic Association, vol. 91(2), pages 268-273, May.
  3. Jack Triplett, 2004. "Handbook on Hedonic Indexes and Quality Adjustments in Price Indexes: Special Application to Information Technology Products," OECD Science, Technology and Industry Working Papers 2004/9, OECD Publishing.
  4. Pendakur, K., 1999. "Taking Prices Seriously in the Measurement of Inequality," Discussion Papers dp99-7, Department of Economics, Simon Fraser University.
  5. Muellbauer, John, 1974. "Prices and Inequality: The United Kingdom Experience," Economic Journal, Royal Economic Society, vol. 84(333), pages 32-55, March.
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  7. Fry, Jane M. & Fry, Tim R. L. & McLaren, Keith R., 1996. "The stochastic specification of demand share equations: Restricting budget shares to the unit simplex," Journal of Econometrics, Elsevier, vol. 73(2), pages 377-385, August.
  8. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  9. Aaron Nicholas & Ranjan Ray & Rebecca Valenzuela, 2008. "Evaluating The Distributional Implications Of Price Movements: Methodology, Application And Australian Evidence," Development Research Unit Working Paper Series 33/08, Monash University, Department of Economics.
  10. Kenneth W Clements & Dongling Chen, 2009. "AFFLUENCE AND FOOD A Simple Way to Infer Incomes," Economics Discussion / Working Papers 09-08, The University of Western Australia, Department of Economics.
  11. Kenneth W. Clements & H.Y Izan & E Antony Selvanathan, 2005. "Stochastic Index Numbers: A Review," Economics Discussion / Working Papers 05-08, The University of Western Australia, Department of Economics.
  12. Seale, James L., Jr. & Regmi, Anita & Bernstein, Jason, 2003. "International Evidence On Food Consumption Patterns," Technical Bulletins 33580, United States Department of Agriculture, Economic Research Service.
  13. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  14. Finke, Renate, 1983. "A new cross-country tabulation of the quality index of consumption," Economics Letters, Elsevier, vol. 13(1), pages 11-14.
  15. Veblen, Thorstein, 1899. "The Theory of the Leisure Class," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number veblen1899.
  16. Saeed Heravi & Alan Heston & Mick Silver, 2003. "Using Scanner Data to Estimate Country Price Parities: A Hedonic Regression Approach," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 49(1), pages 1-21, 03.
  17. Muellbauer, John, 1974. "Household Production Theory, Quality, and the "Hedonic Technique."," American Economic Review, American Economic Association, vol. 64(6), pages 977-94, December.
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Cited by:
  1. Clements, Kenneth W. & Gao, Grace, 2012. "Quality, quantity, spending and prices," European Economic Review, Elsevier, vol. 56(7), pages 1376-1391.

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