The relationship between income distribution and household consumption over comparative consumption functions: The case of the European Union

This thesis study consists of three essays on income distribution and consumption expenditure. In the first essay, traditional consumption functions examined through the sample of EU member states and negotiating countries, using data from the World Bank, Bank for International Settlements (BIS), and the Statistical Office of the European Communities (EUROSTAT). Based on the information that macroeconomic variables as income and consumption are nonnormally distributed, the permanent income hypothesis is validated for the underlying countries, according to the Generalized Linear Model (GLM) estimators on the gamma distribution. In the second essay, household consumption expenditures are analyzed for twelve (12) categories and examined over microdata. The hypothesis of "Gini elasticity of food expenditure is -1" is tested, and the income distribution elasticity of each expenditure category is estimated. Accordingly, the Gini elasticity of food expenditures in the EU (15) sample is -0,2. While the deterioration in income distribution decreases expenditure on necessities such as food, clothing, and housing, it increases luxury expenditure such as furniture, entertainment, and education. With the overall consumption expenditure given by approximately 50 percent into necessity categories, the deterioration in the distribution of income directly affects total demand. Therefore, policies aiming for stability in aggregate demand also need to aim for a better distribution of income. In the third essay, the "Partial Adaptive Distribution Model", which includes the mechanism of resource transfer from developed countries to less-developed nations, is tested from an empirical perspective. According to the parameters obtained through the "Combined Index" of the Palma ratio and the Human Development Index (HDI), the income share of the poorest 40% is expected to increase by 0.57 percent, while the share of the richest 10% is expected to decrease by 0.06 percent. Accordingly, within the framework of this finding, the study proposes a method for more stable income distribution.