Geographic Aggregation and the Measurement of Real Consumption Growth and Volatility

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