The Economics of Global Consumption Patterns

Henri Theil devoted a good deal of the last two decades of his professional activities to the analysis of international consumption patterns. He had the bold idea of using a single system of demand equations to explain the variability of consumption patterns across widely diverse countries. In view of the tremendous variability of consumption across countries (as an example, the proportion of the budget devoted to food is above 50 percent in the poorest countries, while it is in the vicinity of 10 percent in the richest), this was an ambitious undertaking. To implement the idea, Theil used the ICP data to estimate a cross-country system of demand equations under the assumption that tastes were the same internationally. While this is quite acceptable at Chicago where tastes are an immutable constant, others could find the assumption more controversial. This paper commences with a review of Theil's path-breaking research on demand analysis, including cross-country applications, and then investigates in some detail two important issues. First, we analyse the extent to which differences in incomes and prices explain international consumption patterns; and, second, we provide 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.