Empirical Economics (1994) 19:69-110 IIIIII/EAI PI R I CAL IIIIIIIECONOMICS Understanding Consumption Patterns 1 KENNETH W. CLEMENTS Economic Research Centre, Department of Economics, The University of Western Australia, Nedlands Perth, Western Australia 6009, Australia SAROJA SELVANATHAN School of Commerce and Administration, Griffith University, and Economic Research Centre, Department of Economics, The University of Western Australia, Perth, Western Australia 6009, Australia Abstract: The analysis of consumer demand is one of the major successes of economics as it repre- sents the near perfect marriage of theory and econometrics, This paper reviews, distills and systema- rises some of the major empirical findings on consumption patterns, concentrating in particular on the more recent (and, in some cases, more controversial) evidence. One of the key conclusions of the paper is that on the basis on new methods, the hypotheses of homogeneity, symmetry and preference independence are not at such wide variance with the data as was once thought to be the case. JEL Classification System-Numbers: D12, D51 1 Introduction The study of consumption patterns is important for a number of reasons. First, as total consumption absorbs more than 70 percent of GDP in most countries, it is the largest of the macroeconomic aggregates, thus having great significance for the state of the economy as a whole and business conditions. Second, the pattern of consumption contains a wealth of useful information regarding eco- nomic welfare and living standards. Closely allied to this is that as consumption (both current and future) is the ultimate objective of all economic activity and economic systems (mercantilists notwithstanding), in a fundamental sense con- sumption patterns are an objective way of measuring and assessing economic performance. Finally, an understanding of the price-responsiveness of consump- tion is of crucial importance for a host of microeconomic policy issues including public-utility pricing, the measurement of distortions, optimal taxation and the treatment of externalities. It is partly for these reasons that the analysis of consumption has attracted the attention of some of the best minds in economics and econometrics. Addi- tional reasons which account for the extent of sophisticated econometric analy- '~ We are grateful to Dongling Chen, Daranee Chenhall and Ken Cole for their hetp in producing this paper; and to Ranjan Ray, Antony Selvanathan, David Treloar and two anonymous referees of this journal for useful comments. Clements is pleased to acknowledge the support of an ARC grant. Sections 4 and 5 of this paper draw on Clements, E. A. Selvanathan and S. Selvanathan (1992). 0377-7332/94/1/69-110 $2.50 9 1994 Physica-Verlag, Heidelberg