Luxury Cars Out to Pasture

Global Economic Growth: From Meat to Luxury Cars

Sep 18, 2013 • Demand, Supply, and Markets, Developing Economies, Economic Growth, Economic History, International Trade and Finance, Macroeconomic Measurement, Uncategorized • 396 Views    No Comments

For many of us, becoming  more affluent first means more meat and then maybe a washing machine.

Imagine a spending ladder in emerging market nations like the BRICs–Brazil, Russia, India, China. At each rung, spending surges and then flattens at that higher level when consumers can afford to climb to the next step.

These are the steps:

Commodities

  • wheat
  • meat
  • energy
  • copper

Consumer Durables

  • washing machines
  • cars
  • dishwashers
  • luxury cars

Services

  • advertising
  • insurance
  • domestic tourism
  • international tourism

 

And here is the ladder:

Emerging Markets consumer spending

The ladder is all about demand. At  first there might be a surge in demand for wheat and meat. Then, as income grows, wheat and meat demand remain at that higher level while marginal spending targets consumer durables like washing machines and cars.

The same pattern repeats itself. First a spending surge and then saturation. When people have all they need and their income rises, they move to the next level and spending increases. Ultimately, they reach the level where they can afford the icing on the cake–the services that characterize affluence.

Looking back, emerging markets have already significantly fueled demand for global commodities and low end consumer durables. By contrast, the high end demand spike for dishwashers and luxury cars has only just begun.

Yes, the researchers warn us that they had to vastly simplify complex data to arrive at their conclusions. But still they say their outcomes are valid. While countries will vary (for example, with China a decade ahead of India), still, as per capita income ascends, so too will consumers’ position on the spending ladder.

Where does this leave us? Global economic growth could be fueled by rising and shifting demand from emerging markets.


Sources and resources: My source is a report from Goldman Sachs Global Investment Research, “What the World Wants.” I also recommend looking at this econlife post on the washing machine and this wonderful Hans Rosling TED talk to see how the washing machines lets consumers move up the spending ladder:

 

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