Income distribution, the structure of consumer expenditure and development policy

This paper examines how and why the effects of inequality on the structure of consumption must be taken into account in development policy. It shows that, by utilising the concept of the ‘representative’ consumer, the role of income distribution as a determinant of the structure of consumption can be modelled in a theoretically consistent and empirically constructive way. The importance and methods of introducing consumer preferences and needs into the model are also analysed. Then using a simple Greek input‐output model several hypotheses about income redistribution are empirically investigated. The results indicate that egalitarian redistributions induce favourable employment and balance of payments effects, especially when the planner takes into account other sources of variation in consumer demand arising from differences in preferences across households. Rises in inequality are likely to cause comparatively more serious opposite effects and therefore must be avoided.