A Look at the Marginal Propensity to Consume of the US, China, and the Philippines

This output aims to discuss insights and findings from a quick glance at the economies of three countries: the United States of America; China; and the Philippines - more particularly in line with their Marginal Propensity to Consume derived from consumption expenditure and gross domestic product data through the years.

Understanding the Concepts

Marginal Propensity to Consume (MPC) is defined as the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it. It is a component of Keynesian macroeconomic theory and is calculated as the change in consumption divided by the change in income. MPC is depicted by a consumption line, which is a sloped line created by plotting the change in consumption on the vertical “y” axis and the change in income on the horizontal “x” axis. Source: Investopedia ¹

Now, what’s Final Consumption Expenditure? In the national accounts expenditure on goods and services that are used for the direct satisfaction of individual needs (individual consumption) or collective needs of members of the community (collective consumption) is recorded in the use of income account under the transaction final consumption expenditure (FCE). Source: Wikipedia ² This data is used in this output for the purpose of covering for more consumption types and segments in countries being compared.

Lastly, as we all know, Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of the country’s economic health. Source: Investopedia ³

Though GDP is usually calculated on an annual basis, it can be calculated on a quarterly basis as well. In the United States, for example, the government releases an annualized GDP estimate for each quarter and also for an entire year. Most of the individual data sets will also be given in real terms, meaning that the data is adjusted for price changes, and is, therefore, net of inflation.

options(scipen = 10)
library(RcmdrMisc)

The US

USFCEGDP <- readXL("recon_homework_1_united.xlsx")
CHINAFCEGDP <- readXL("recon_homework_1_china.xlsx")
PHILFCEGDP <- readXL("recon_homework_1_phil.xlsx")
USFCEGDP.lm <- lm(fce~gdp, data=USFCEGDP)
CHINAFCEGDP.lm <- lm(fce~gdp, data=CHINAFCEGDP)
PHILFCEGDP.lm <-lm(fce~gdp, data=PHILFCEGDP)
summary(USFCEGDP.lm)

Call:
lm(formula = fce ~ gdp, data = USFCEGDP)

Residuals:
          Min            1Q        Median            3Q           Max 
-251727742353 -100288920524  -43229215051   67715544938  326766729846 

Coefficients:
                      Estimate         Std. Error t value Pr(>|t|)    
(Intercept) -84480719908.02203 198020325689.55096  -0.427    0.675    
gdp                    0.83262            0.01299  64.082   <2e-16 ***
---
Signif. codes:  0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 169900000000 on 17 degrees of freedom
Multiple R-squared:  0.9959,    Adjusted R-squared:  0.9956 
F-statistic:  4106 on 1 and 17 DF,  p-value: < 2.2e-16

Using Regression, the US’ Final Consumption Expenditure can be expressed as:

\[ fce = -84480719908.02203 + 0.83262gdp + \epsilon \]

China

summary(CHINAFCEGDP.lm)

Call:
lm(formula = fce ~ gdp, data = CHINAFCEGDP)

Residuals:
          Min            1Q        Median            3Q           Max 
-235939480967 -133196150989   40579373993  122440724296  215514196350 

Coefficients:
                      Estimate         Std. Error t value Pr(>|t|)    
(Intercept)  8057183625.759058 59012678675.209900   0.137    0.893    
gdp                   0.520302           0.008015  64.917   <2e-16 ***
---
Signif. codes:  0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 143800000000 on 17 degrees of freedom
Multiple R-squared:  0.996, Adjusted R-squared:  0.9957 
F-statistic:  4214 on 1 and 17 DF,  p-value: < 2.2e-16

Applying regression here as well, will give us this expression:

\[ fce = 8057183625.759058 + 0.520302gdp + \epsilon \]

The Philippines

summary(PHILFCEGDP.lm)

Call:
lm(formula = fce ~ gdp, data = PHILFCEGDP)

Residuals:
        Min          1Q      Median          3Q         Max 
-5770523011 -1007547859   645634020  1207898836  4226371853 

Coefficients:
                      Estimate         Std. Error t value Pr(>|t|)    
(Intercept) -1567809051.078522  1236005956.777515  -1.268    0.222    
gdp                   0.849489           0.005896 144.078   <2e-16 ***
---
Signif. codes:  0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 2295000000 on 17 degrees of freedom
Multiple R-squared:  0.9992,    Adjusted R-squared:  0.9991 
F-statistic: 2.076e+04 on 1 and 17 DF,  p-value: < 2.2e-16

Lastly, the Philippine Final Consumption Expenditure can be expressed as:

\[ fce = -1567809051.078522 + 0.849489gdp + \epsilon \]

Since MPC equates to how much people spend for every single amount of money, in this case dollar, they earn, the numbers tell us that Filipinos (MPC = 0.85) spend more than Americans (MPC = 0.83) and Chinese (MPC = 0.52) do. This can be correlated to each community’s spending behaviour, its saving habits, and its perception towards consumption. We, Filipinos, are closer to consuming the maximum amount from what we earn and while that seems to be pessimistic for the banks, it may actually be healthy for the economy. Long-term effects of these habits and behaviors may be different though, considering social and environmental impact, and the ever-changing economic climate which may lean towards either spending more or saving more in the future. There are also many more factors to consider if we are to dive deeper into each of these countries’ economy, like the value of money, cost of living, etc.

For additional data and more information on the topic, please check out the reference below.

References:

¹ https://www.investopedia.com/terms/m/marginalpropensitytoconsume.asp

² https://en.wikipedia.org/wiki/Final_consumption_expenditure

³ https://www.investopedia.com/terms/g/gdp.asp

https://data.worldbank.org/