WEALTH, DISPOSABLE INCOME AND CONSUMPTION - Economics

∞
1 + xt + j
Ht = Xt 1 + E ⎛
t ------------------- ⎞
∑ ∏
≡ X
⎝1+ r ⎠ tΓt t + j
i
i = 1 j = 1
7
(2.4)
where H is human wealth and Γ represents the term in the outer square
brackets. The problematic aspect of measuring human wealth is that the
cumulative growth factor Γ is not directly observable, because it depends
on expectations.
One approach to measuring Γ
would be to develop a fully articulated
macro model and then invoke the rational expectations hypothesis.
This approach would be very ambitious. A more modest approach, and the
one pursued in this study, is to model the behaviour of variables over
which expectations must be taken using time-series techniques and then
use the resulting time-series model to compute expectations of the future.
This approach is implemented by estimating a bivariate VAR to characterize
the joint distribution of the growth rate of labour income net of government
expenditures (hereafter, net income) and the real interest rate. The
estimated bivariate VAR is then approximated as a discrete-valued finitestate
vector Markov chain and this approximated system is used to compute
the expected discounted value of future net income growth.
2.1.1 A time series model for net income and the real interest rate
The first step is to define net income and the interest rate and to examine
their time-series properties. All the variables used in this study together
with the raw data sources are described in Appendix 1, but the most
important details deserve some comment.
In an effort to get a more complete measure of aggregate labour
income, the published labour income series is augmented to include labour
income in the farming and unincorporated business sectors. It is assumed
that the share of labour in these two categories is the same as for the overall
economy.
Government expenditure on goods and services is measured as the
reported quarterly government expenditure series less the fraction of the