Quality, quantity, spending and prices

• Published in: European economic review 2012-10, Vol.56 (7), p.1376-1391
• Main Authors: Clements, Kenneth W., Gao, Grace
• Format: Article
• Language: English
• Subjects: Consumer demand; Consumer expenditure; Consumer spending; Consumption; Indexes; Luxuries; Luxury; Prices; Quality; Quality standards; Studies
• ISSN: 0014-2921; 1873-572X
• DOI: 10.1016/j.euroecorev.2012.06.006

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. ► Exploration of Theil's quality index, a quality measure based on the luxury/necessity distinction. ► Extension to two other indexes which measure the price of and spending on quality. ► Comparison of hedonic and Theil approaches to quality. ► Analysis of the underlying uncertainty of the quality measures. ► Application to the International Comparison Project data with 100+ countries.