Optimism and pessimism: A cross-country comparison

Optimism and pessimism influence economic choices. If consumers are optimistic, they tend to spend a greater proportion of their budget shares on luxuries and a lesser proportion on necessities. Many models of consumer expenditure do not take into account the influence of optimism and pessimism. This paper demonstrates a way to indirectly measure optimism and pessimism by focusing on patterns in Engel curve residuals for necessities and luxuries. Using the revised International Comparison Program (ICP) 2005 data covering 144 countries, this paper presents economy-wide optimism and pessimism indicators. These indicators provide a useful complement to traditional economic measures of standard of living such as real gross domestic product (GDP) in purchasing power parity (PPP) terms. These indicators are non-economic in traditional terms. However, since they are constructed as residuals from an economic analysis, they could act as a very useful complement to traditional economic indicators and, as such, may be termed “quality of life” indicators.