Thursday, December 31, 2015

Consumption of Goods in Canada

Prices, interest rate, and disposable income are variables explaining households’ consumption. Their impacts vary depending on the types of consumption goods. For instance, while the consumption of durable and semi-durable goods increase along with real disposable income, that is not the case for the consumption of non-durable goods.

I earlier defined the three types of consumption goods and showed their importance and evolution over time in Canada. [here] In this post, I have done some multivariate analyses showing the proportion of the observed variability in each type of consumption good explained by the above mentioned determinants.

Durable Goods
Most of variability in the consumption of durable goods is explained by the personal disposable income (55%). An increase of one percentage point (pp) in real disposable income induces an increase of .05 pp in the share of consumer durables in gross domestic product (GDP).
Interest rate (precisely, the consumer loan rate) explains 18% of the observed variability. A fall of one pp in interest rate causes a rise of .03 pp in the share of consumer durables because it lowers financing cost.
 The price of consumer durables also plays an important role. It significantly explains 23% of the observed variability. When the price of consumer durables falls by one pp, their share increases by .004 pp, every else held constant. The consumption of durables is independent of the price of the non-durable consumption goods.

Semi-Durable Goods
Disposable income is also the most important determinant of the consumption of semi-durable goods. All alone, it explains 58% of the observed variability in its share in GDP. The share of semi-durable goods increases by .01pp when the disposable income increases by one pp.
Then comes interest rate which explains 32% of the observed variability. The share of semi-durable goods increases by .01 pp, when interest rate falls by one pp.
The price of semi-durable goods is negatively related with  their share. The slope parameter is -.02.

Non-Durable Goods
Its share in GDP falls by .04 pp when the disposable income increases by one pp. The latter variable explains 27% of the observed variability.
Interest rate does not significantly explain this type of consumption.

See dataset here