Demonstration Effect Essay

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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.


  1. 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);
  2. 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);
  3. George Kottis, “The International Demonstration Effect as a Factor Affecting Economic Development,” Kyklos (v.24/3, 1971);
  4. Po-Ting Liu and Guang-Zhen  Sun, International   Demonstration  Effect and  Domestic  Division of Labour: A Simple Model (Monash University, 2005);
  5. Jerome L. Mcelroy and Klaus De Albuquerque, “The Tourism Demonstration Effect in  the  Caribbean,” Journal of Travel Research (v 25/2, 1986);
  6. Ragnar Nurske, Problems of Capital Formation in Underdeveloped Countries (Oxford: Blackwell, 1964).

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