How Economic Contractions and Expansions Affect Expenditure Patterns

TLDR: In this paper, the authors attempt to understand how household budget allocations across various expenditure categories change when the economy is in recession or expansion and propose a conceptual framework based on the notion of relative consumption.

Abstract: In this study, we attempt to understand how household budget allocations across various expenditure categories change when the economy is in recession or expansion The common assumption is that a household’s tastes would not change as a function of economic conditions and therefore any adjustments in expenditure patterns during economic contractions/expansions would simply be due to changes in the consumption budget Standard economic models translate these budgetary effects into lateral movements along a set of fixed Engel curves, which relate category expenditure shares to total expenditures We propose and test a conceptual framework based on the notion of relative consumption, which prescribes that, for any given total consumption budget, expenditure shares for positional goods/services will decrease during a recession, while shares for nonpositional goods/services will increase (ie, shifting the entire Engel curve upward or downward, depending on the nature of the expenditure category and the economic conditions)