Monday, March 3, 2014

Household Consumption of Goods in Canada

While non-durable goods are still an important component of household consumption expenditure on goods in Canada, the share of durable goods has almost doubled in three decades. Durable goods have become affordable because their price has fallen and household disposable income has increased.

By household consumption of goods, Economists mean the expenditures made by all of us on goods that are used to satisfy our own needs. Some of these goods, food for instance, are perishable while others, cars for instance, last longer and can be used several times. This makes distinguish between non-durablesemi-durable, and durable (consumption) goods.
Non-durable goods are goods that are perishable or completely consumed in a single use. Examples of non-durable goods include food, drink, disposable utensils and cutlery, first aid supplies, packaging papers, and food wraps.
On the opposite, durable goods also called hard goods are goods that have a lifespan of at least three years. They can be rented, bought new, and resold. They can also be paid off in one go or in installments. Durable goods come with a manufacturer warranty that prevents their initial users from defects and premature wear. Cars, domestic appliances, cellphones, lawnmowers, and snow-blowers are some examples of durable goods.
In-between non-durable and durable goods are products that are obviously qualified as semi-durable. Clothing and footwear are semi-durable goods.

Over the time period ranging from 1981:Q1 to 2013:Q4, the average quarterly growth rate of household consumption of goods in Canada is .62 %. As one could see in the table below, non-durable, semi-durable, and durable goods account respectively for 35 %, 19 %, and 41 % of this growth.  

Table: Growth Rates of Different Types of Consumption Goods and their Contributions to all Consumption Goods Growth, Canada, 1981:Q1-2013:Q4, Data Source: Statistics Canada
Growth Rates of Different Types of Consumption Goods and their Contributions to all  Consumption Goods Growth, Canada, 1981:Q1-2013:Q4, Data Source: Statistics Canada

In column (b) of the above table 1, the average contribution to all consumption goods expenditure growth rate for a given type of good is an average of the quarterly growth rates of household consumption expenditure on this type of good weighted by its share in household consumption expenditure on all goods.
The elements in column (c) are those in column (b) as a percentage of the average growth rate of the consumption expenditure on all goods.

The average growth rate of durable goods consumption turns out to be higher than those of the two other types of goods. This is explained by the important fall observed in the price of durables since 2000 and the increase in household disposable income. As a matter of fact, after reaching a peak in 1998, the price of durables has progressively fallen back to their level of 1988 while the price of non-durable goods keeps increasing and that of semi-durable goods is only falling moderately.

I will now explain, in turn, the behavior over time of the share of each of these three types of goods in household consumption expenditure on goods.   

The Non-Durable Goods
More than half of household consumption of goods is made up of non-durable goods. In the first quarter of 1982, three-quarters of the goods consumed by households in Canada were non-durable goods.  As one could see in the first and second panels of Figure 1, this share is declining over time to reach an off-peak of 51 % in the second quarter of 2013.

Real Personal Disposable Income, Price, Share in Household Consumption of Goods, Price Elasticity, and Income Elasticity of Non-Durable Goods, Canada, 1981:Q1-2013:Q4, Data Source: Statistics Canada
Figure 1: Real Personal Disposable Income, Price, Share in Household Consumption of Goods, Price Elasticity, and Income Elasticity of Non-Durable Goods, Canada, 1981:Q1-2013:Q4, Data Source: Statistics Canada

 The first panel of Figure 1 shows that while the share of non-durable goods is decreasing, their consumer price index (CPI), i.e., the ratio of their current price level to the their price level of 2002, keeps increasing.

The panel 3 plot the price elasticity of the demand for non-durable goods. This price elasticity indicates the percentage change in the share of non-durable goods resulting from a one percent increase in their price, everything else held constant. The price elasticity fluctuates around a mean of -.36, which means the demand for non-durable goods is mostly price inelastic. The demand for a good is said to be price inelastic when the absolute value of its price elasticity is less than one. When the price of non-durable goods increases by one percent, on average, the induced decrease in the demand of these goods is less than one percent.

The second panel of Figure 1 shows that the share of non-durable goods is decreasing while the personal disposable income index is increasing.

Panel 4 plots the income elasticity of the demand for non-durable goods, i.e., the percentage change in the demand for non-durable goods occasioned by a one percent increase in income, everything else held constant. The average of this elasticity is -.45. This negative value indicates that as people are getting wealthier, they forgo their consumption of some less sophisticated goods. They will start using, for instance, battery or electric shavers rather than disposable razors or power toothbrushes rather than the ordinary ones, which decreases their consumption of non-durable goods.

The Semi-Durable Goods
The share of semi-durable goods in household consumption of goods has declined from 15.48 % in the first quarter of 1981 to reach an off-peak of 14.48 % in the third quarter of 1991. Over the same period, as one could see it in the first panel of Figure 2, their price was increasing. Their price in the third quarter of 1991 was 61 % higher than in the first quarter of 1981. After that, the share of semi-durable goods has become upward tended. At the end of 2013, semi-durable goods represented almost 18 % of Canadians’ spending on goods.

Real Personal Disposable Income, Price, Share in Household Consumption of Goods, Price Elasticity, and Income Elasticity of Semi-Durable Goods, Canada, 1981:Q1-2013:Q4, Data Source: Statistics Canada
Figure 2: Real Personal Disposable Income, Price, Share in Household Consumption of Goods, Price Elasticity, and Income Elasticity of Semi-Durable Goods, Canada, 1981:Q1-2013:Q4, Data Source: Statistics Canada

The third panel of Figure 2 plots the price elasticity of demand for semi-durable goods. This price elasticity fluctuates around a mean of .07, which suggests that the demand for semi-durable goods is also mostly price inelastic. Besides, semi-durable goods turn out not to be ordinary goods unlike non-durable goods since their demand tend to increase along with their price.

Panel 2 of Figure 2 shows a positive correlation between the demand for semi-durable goods and personal disposable income. The average value of the income elasticity series plotted in the Panel 4 is .21.

The Durable Goods
Their share in household consumption of goods keeps increasing. At the end of 2013, 30 % of our expenditures on goods were on durables whereas this share was only 16 % in 1982. It also appears in the first panel of Figure 3 that after reaching a high of 102.2 at the beginning of 1998, the price of durables fell back last year to the level of 85, which means that durables are cheaper now than they were at the end of 1988 while our incomes are 77 % higher now than in 1988.

Real Personal Disposable Income, Price, Share in Household Consumption of Goods, Price Elasticity, Income Elasticity of Durable Goods, Canada, 1981:Q1-2013:Q4, Data Source: Statistics Canada
Figure 3: Real Personal Disposable Income, Price, Share in Household Consumption of Goods, Price Elasticity, Income Elasticity of Durable Goods, Canada, 1981:Q1-2013:Q4, Data Source: Statistics Canada

The average value of the price elasticity for the demand for durables plotted in the third panel of Figure 3 is .81. The positive value of this elasticity suggests durables are luxury goods –the proper expression for that is Giffen good.  Besides, when households’ incomes increase by one percent, they increase their expenditure on durables by .69 %.

Durables are affordable now but their useful lifespan is decreasing. This phenomenon is called planned obsolescence. It also cost more now to get a broken durable repaired than buying a new one. The rise in households’ consumption of durables is good for the economy but raises environmental problems.