Geographic Aggregation and the Measurement of Real Consumption Growth and Volatility

59 Pages Posted: 25 May 2018

See all articles by Jonathon Lecznar

Jonathon Lecznar

Arthur Smith

Boston University, College of Arts and Sciences, Department of Economics, Students

Date Written: April 17, 2018

Abstract

We estimate real consumption's growth rate and volatility in light of three new facts documenting geographic differences in consumption: (1) consumers in separate markets buy different products, (2) a product's market share varies geographically conditional on relative price, and (3) product variety growth and its cyclicality varies geographically. These facts suggest that existing methods to account for product variety changes overstate the benefits to consumers by overlooking geographic diversity in consumption baskets. Quantitatively, focusing on aggregate product variety changes overstates real consumption growth by 2.75 percentage-points primarily by assuming that local product entry benefits all consumers nationally. Nonetheless, accounting for product variety changes is important. Our real consumption series grows 3 percentage-points faster than a statistical agency benchmark and has twice the volatility due to product variety’s procyclicality.

Keywords: geography, consumption, measurement, welfare, price index

JEL Classification: D12, E01, E31, E32, R10

Suggested Citation

Lecznar, Jonathon and Smith, Arthur, Geographic Aggregation and the Measurement of Real Consumption Growth and Volatility (April 17, 2018). Available at SSRN: https://ssrn.com/abstract=3048600 or http://dx.doi.org/10.2139/ssrn.3048600

Arthur Smith

Boston University, College of Arts and Sciences, Department of Economics, Students ( email )

270 Bay State Road
Boston, MA
United States

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