How Inter-Temporal Trade Consumption Affects Standard of Living

Inter-Temporal Trade Off in Consumption: Effects on Living Standards

In economics, the relevance of substitution cannot be overstated. For instance, when there is an increase in the price of a certain good, consumers tend to substitute the affected good with a less expensive substitute good. In macroeconomics, the substitution principle is applied in inter-temporal trade-off analysis, albeit in a temporal context. This text concerns itself with inter-temporal trade off in consumption and how it impacts on living standards.

Inter-temporal Choices: A Brief Overview

Inter-temporal choices according to Camerer are those "decisions involving trade-offs among costs and benefits occurring at different times" (13). Thus in basic terms, inter-temporal choices include decisions whose consequences or impact are felt in multiple time periods i.e. during the present period or during a future period. This is consistent with Rossana's view of inter-temporal analysis as an "analysis of economic behavior over multiple periods of time" (14). Examples that suffice in this context include but are not in any way limited to decisions touching on consumption, saving, work effort etc. A good example of an inter-temporal tradeoff in this context is when an individual limits his or her present consumption so as to be able to consume at a certain time in the future. For instance, rather than spend a large portion of income in the present, an individual could choose to save a significant portion of the same for retirement.

Inter-temporal Trade Off in Consumption: Effect on Living Standards

As I have already noted above, substitution and trade-offs remain key principles in economics. In a way, one of the most basic considerations in regard to inter-temporal trade off has to do with the submission that future alternatives are likely to be impacted upon by alternatives chosen in the current day. It can be noted that individuals mainly have two choices when it comes to decisions regarding how to spend their incomes. In this case, they can decide to either spend all the income they rake in or save a certain portion of the same for future consumption. In this scenario, inter-temporal trade off in consumption attempts to answer the question regarding how consumers considered rational distribute their consumption within a specific period under consideration. To shed more light on this, I will limit myself to only the current time period and the future time period. With that in mind, consumers thus face only two alternatives namely future consumption and current consumption. Taking the first alternative into consideration, the consumer may choose to consume all the income in the current period. In this case, an assumption could be roped in to the effect that there is no future at all. Further, the consumer can choose to consume all his or her future income in the current period. For this to happen, the consumer could seek to borrow the future figure during the current period. Considering that a consumer uses up all his or her income within the present period, this means that their consumption will be increased in the current period under consideration. Here, it is assumed that the present consumption will be geared towards the improvement of the consumer's standards of living. Thus with an increase in consumption, the standards of living of such consumers is bound to improve, albeit in the short run. In the long run, the consumer's standards of living could nosedive for two main reasons. First, the consumer could be required to repay the amount borrowed during the previous period (if any) and secondly, savings could be insufficient to finance the prevailing consumption demands.