Consumption expenditure is a very important area of economic research since it is one of the main determinants of economic activity. In the context of the Australian economy, approximately sixty per cent of aggregate demand is attributed to private final consumption expenditure (see the latest National Accounts publication, Australian Bureau of Statistics).
There have been a large and somewhat exhaustive number of studies done on the determinants of consumption behaviour in the single equation framework with each study claiming varying degrees of success in the explanation and prediction of consumption. However, due to simultaneous interactions that exist between sectors in the economy, it seems more realistic to examine the consumption function in the context of a full econometric model; an issue which has so far been sadly neglected in the Australian literature of consumption functions.
This thesis is directed at these deficiencies in the literature by examining the consumption function in the context of the Australian Medium-Term Policy simulation (AMPS) model with consideration to consumption theory, a general model will be devised and tested. A comparison will then be made, between the preferred equation obtained from this model and the existing consumption specification in the AMPS model, based on how each model performs.