The economic behaviour of seven billion consumers: food, functional form and quality

In additional to representing a substantial share of gross domestic product, consumption is of major economic importance, as it involves affluence, poverty, inequality and the overall utility experienced by people. This thesis investigates three related issues that deal with consumption in a cross-country context. We provide an in-depth analysis of consumption of food as it occupies a role of particular importance in the consumer's budget, especially in poor countries. Given that real incomes can change substantially across countries, key elements of understanding global food demand are the dependence of the income elasticity on income and ensuring that the food budget share always lies within the [0, 1] range. Various forms of the food Engel curve are explored by emphasising the economic behavior of the budget share and the income elasticity. Allowing for the substantial variation in prices across countries, a new functional form is introduced and applied to the 130+ countries from the International Comparison Program (2008). The analysis is then expanded from food to the whole consumption basket. Under appropriate separability conditions, we introduce a new approach by showing how different functional forms of demand equations can be used for different groups of goods. This "mixed functional form" approach leads to considerable flexibility and convenience in explaining consumption behavior. The application to the ICP data indicated that the approach is viable. This thesis also explores an unconventional approach to measuring quality. As the consumer becomes richer expenditure moves towards more luxurious goods, away from necessities. Thus, quality can be measured by observing the nature of the change in the composition of the consumption basket: If the basket is made up of more luxuries and less necessities, it has become more desirable and quality has increased.