The main goal of this paper will be to determine which of the two is more important in case of consumption. First of all, a theoretical analysis of the possible explanations of each relationship based on the existing literature will be presented. Then the research will proceed to the empirical tests (correlation and regression using SPSS Statistics software) of a created model based on consumption, gross national income as well as length of retirement in the United States and the United Kingdom over the period of 46 years. The piece will finalise with some general conclusions that can be drawn from the conducted research.
Consumer behaviour is a subject of interest to many different players in the economy. Companies gather information on their current and potential customers to determine their selling and production strategies based on what their target customers might want, need, the timing at which to introduce new products, the prices to suit their tastes etc. Governments use the information on their citizens’ spending habits to figure out what policies to implement to receive effective results and garner political support for re-election. People themselves should be acquainted with the subject of consumer behaviour to better understand and use personal spending under different political, economic and social circumstances to lead more stable lives. Because of the immense interest in the subject of consumption many efforts have been put into research to distinguish the most important factors that influence consumer behaviour and so far much of such literature has been dedicated to the influence of current income and expectations (specifically expectations about future income).
Table of Contents
1. Theoretical analysis
1.1 Current Income Influence on Consumption
1.2 Future Income Influence on Consumption
1.3 Expectations for Future Income
1.4 Net Worth and Consumption
1.5 Uncertainty Influence on Consumption
1.6 Mix and Match
2. Empirical analysis methods
3. Empirical analysis
3.1 Empirical results from the U.S. data
4. Conclusions
Research Objectives and Topics
The primary objective of this paper is to determine whether current income or future income expectations exert a more significant influence on consumer behavior. By analyzing existing economic literature and performing empirical testing on data from the United States and the United Kingdom, the research evaluates how these two factors drive household consumption patterns.
- Comparison between current income and future expectations as drivers of consumption.
- Theoretical evaluation of the Life Cycle Model and Permanent Income Hypothesis.
- Statistical analysis using Pearson correlation and regression models.
- Impact of retirement length as a proxy for future income expectations.
- Influence of socioeconomic factors and economic uncertainty on spending habits.
Excerpt from the Book
Current Income Influence on Consumption
First, we should discuss the literature and its arguments in favour of the notion that current income is more important to consumption than income expectations. According to Carroll (1994), there is very little evidence that would support different claims as his work with Consumer Expenditure Survey tests the LCM and finds that consumption is closely related to current income and unrelated to expected changes in income. Thus, the current income may play the major role. In addition to this, Mayer (1972) and Lavi (2003) agree that the social class one belongs to determines their consumption behaviour. More importantly, Mayer (1972) points out that permanent income is the main driver of consumption due to psychological factors since individuals in developed countries are used to fulfilling all their needs and some additional wants, therefore, increases in income do not change people’s habits and individuals only make adjustments when income decreases. This implication thus goes with above mentioned Carroll’s (1994) inference that consumption depends on income.
On the other hand, Lavi’s (2003) study on consumption in Israel notices that changes in expenditure happen in both cases: when the permanent income increases as well as decreases, but only in the long run. According to his findings, consumer behaviour is not affected in the short term yet this changes when low-income individuals are affected by changes in earnings – small rises immediately lead to higher consumption (Lavi, 2003). Moreover, Baxter & Jermann (1999) in their research found an argument that consumption is excessively sensitive to income in the sense that current income still has explanatory power after accounting for the innovation in permanent income, thus, concluding that current income plays a significant role explaining impact on consumption.
Summary of Chapters
Theoretical analysis: Provides a comprehensive review of existing literature regarding the Life Cycle Model and the Permanent Income Hypothesis, discussing the drivers of consumer spending.
Empirical analysis methods: Details the statistical procedures, economic indicators (GNI and retirement length), and the methodology used to test the relationship between income and consumption.
Empirical analysis: Presents the statistical findings and regression models for the United States and the United Kingdom, illustrating the correlation between income variables and consumption.
Conclusions: Synthesizes the research findings, confirming the dominant influence of current income and acknowledging the complexities in measuring the impact of future expectations.
Keywords
Consumption, Consumer Behavior, Current Income, Future Income, Expectations, Life Cycle Model, Permanent Income Hypothesis, Gross National Income, GNI, Retirement, Statistical Analysis, Pearson Correlation, Regression, Economic Uncertainty, Household Expenditure.
Frequently Asked Questions
What is the central focus of this research paper?
The paper investigates the comparative importance of current income versus future income expectations in determining individual and household consumption patterns.
What are the primary thematic areas covered?
The research explores theoretical economic models, the influence of socioeconomic variables, the role of retirement as a proxy for expectations, and the statistical relationship between GNI and consumer spending.
What is the main research question?
The core question is: Which factor is more important in the case of consumption—current income or expectations about future income?
Which scientific methods are employed?
The study utilizes theoretical literature reviews followed by quantitative empirical methods, specifically Pearson correlation and linear regression analysis, using SPSS Statistics software.
What topics are discussed in the main body?
The body covers theoretical foundations, the impact of current vs. future income, the role of uncertainty, and detailed empirical results for the U.S. and the U.K. based on 46 years of data.
Which keywords best characterize this work?
Key terms include Consumer Behavior, Life Cycle Model, Permanent Income Hypothesis, GNI, Consumption Expenditure, and Statistical Regression.
Why were the U.S. and the U.K. selected for this empirical study?
These countries were chosen because their retirement systems are largely private saving-based, which provides a clearer reflection of consumer behavior compared to states where retirement income is primarily state-provided.
How does the author define the "length of retirement" as a proxy?
The author calculates it by subtracting the expected retirement age from the average life expectancy, using this duration as an indicator for how individuals might adjust current consumption based on future expectations.
- Arbeit zitieren
- Gabriele Pauliuk (Autor:in), 2014, What is more important in case of consumption: Current income or expectations?, München, GRIN Verlag, https://www.grin.com/document/996479
