Demonstration Effect Essay ⋆ Business Essay Examples ⋆ EssayEmpire

The meaning of demonstration effect (DE) depends on the context in which it is used. Regardless of the context, DE entails some form of imitative behavior. This essay focuses on DE as widely used in the consumption, international trade/investment, and international tourism literature.

With globalization and improvements in transportation and communications, the movement of people, businesses, or products across international borders has intensified. As a result, societies are more likely to be exposed to other societies’ lifestyles and consumption habits (e.g., food, transportation, dress, and entertainment). The perception that the new lifestyles are superior may incite their imitation, which may be more expensive. For example, a multinational corporation with headquarters in a more developed country (MDC) may set up production or sales facilities in a less developed country (LDC) and advertise extensively to promote the consumption of its new and more expensive products in the LDC. Also, the arrival of foreign tourists from more affluent countries may expose the populations of the host countries to the tourists’ lifestyles, which may be deemed superior, albeit more expensive. The worldwide proliferation of the internet has also facilitated the accessibility of information pertaining to the superior standards of living enjoyed by other societies, triggering imitation of such living standards.

DE entails the transfer of new and more expensive consumption habits and lifestyles/tastes to other societies. Two aspects of DE are noteworthy. First, DE may affect different countries differently depending on information and transportation costs, sociocultural factors, and effectiveness of advertising or communication networks, among others. Second, since the adoption of expensive tastes is of greater concern to LDCs, whose resources are more limited, DE is widely used in the development literature to mean the adoption of expensive Western standards of living by LDCs. Examples of DE in LDCs include the substitution of expensive infant formula for breast milk and the substitution of cheaper staple foods by more expensive imported foods. Contributory factors to DE include tourism, foreign trade, and the operations of multinational corporations.

The DE concept appeared in the trade literature in the 1940s and 1950s when Milton Friedman and Franco Modigliani, winners of the 1976 and 1985 Nobel Prize in Economics, respectively, and James Duesenberry promoted the idea of “interdependent consumption functions” for which the consumption of one individual/group might influence that of another individual/group. In that literature, DE is labeled the “relative income hypothesis.” Economist Ragnar Nurske popularized the concept in the economic development literature by arguing that the exposure of the LDC populations to information pertaining to the (higher) consumption standards in MDCs incites imitation of these habits with negative impacts on savings and, hence, economic growth in LDCs. In light of this argument, some have ascribed the underdevelopment of LDCs to DE.

How does DE impact economic growth in LDCs? The literature on this issue is convoluted, rendering it difficult to generalize the impact. This difficulty arises because the impact could be positive or negative. For example, as noted above, DE impacts economic growth negatively by reducing savings incentives. However, DE may cause an increase in work incentives to support the expensive lifestyles, with positive effects on growth. Also, DE may have adverse effects on the balance of payments, a statistical summary of the transactions between a country’s residents and its nonresidents during a given period, if the new products are imported from abroad. However, the balance of payments problem may rectify itself over time if local firms imitate investments in the production of the imported goods, thereby reducing the need to import. Thus, the net impact of DE on a particular country depends on the extent to which the positive and negative impacts do cancel out.

As noted above, DE is also used in other contexts. For example, in politics and sociology, DE describes situations in which successful protests/revolutions by political or social activist groups in one place led to their imitation by similar groups in other places. In economics, DE is also used to explain the motives for intergenerational income/wealth transfers. For example, economists Donald Cox and Oded Stark use the concept to convey the ideas that when parents transfer income/wealth to their own parents, they are motivated by the desire that their own children will imitate this behavior in future.

Bibliography:

Donald Cox and Oded Stark, “On the Demand for Grandchildren: Tied Transfers and the Demonstration Effect,” Journal of Public Economics (v.89/9–10, 2005);
Kelley-Gillespie and O. W. Farley, “The Effect of Housing on Perceptions of Quality of Life of Older Adults Participating in a Medicaid Long-Term Care Demonstration Project,” Journal of Gerontological Social Work (v.49/3, 2007);
George Kottis, “The International Demonstration Effect as a Factor Affecting Economic Development,” Kyklos (v.24/3, 1971);
Po-Ting Liu and Guang-Zhen Sun, International Demonstration Effect and Domestic Division of Labour: A Simple Model (Monash University, 2005);
Jerome L. Mcelroy and Klaus De Albuquerque, “The Tourism Demonstration Effect in the Caribbean,” Journal of Travel Research (v 25/2, 1986);
Ragnar Nurske, Problems of Capital Formation in Underdeveloped Countries (Oxford: Blackwell, 1964).

This example Demonstration Effect Essay is published for educational and informational purposes only. If you need a custom essay or research paper on this topic please use our writing services. EssayEmpire.com offers reliable custom essay writing services that can help you to receive high grades and impress your professors with the quality of each essay or research paper you hand in.