Story Of The Week

Economics of Christmas

Christmas season is on, people are busy buying decorations, sweets and gifts for their loved ones. But how do we choose gifts for them? We always buy things for them which we think they would like it, right? Let’s see how choosing gifts for our loved ones impact economy.

The Economics of Christmas is important because Christmas is a peak season for retailers in many countries around the world. Sales increase drastically as people purchase gifts, decorations and various food items to celebrate. The Christmas Season is the heaviest burden for family budgets and also the best business opportunity for retailers. Large part of Christmas spending is allocated to gifts which is nearly 50% of the budget. Consumers in Poland, Netherlands and Ukraine tend to spend the least on gifts, whereas consumers in the UK, USA and France are among the most ready to pay for buying gifts. Film studios release many high budget movies during Christmas season including Christmas films, fantasy movies with high production values.


Last Saturday before Christmas is called Super Saturday which is a major revenue day for American retailers, marking the end of the shopping season. This day targets last minute shoppers offering one day sales in an effort to accrue more revenue than any other day in the Christmas and holiday season.

Despite increased overall spending, Christmas is a dead-weight loss under microeconomic theory, because of the effect of gift giving. This loss is calculated as the difference between what the gift giver spent on an item and what the gift receiver would have paid for the item. The most efficient gift is hard cash, but exchanging equivalent sums of money lacks sentimental value and festive spirit so people prefer buying gifts. Resources are incorrectly allocated because one person has to decide what someone else wants without having the knowledge of other person’s liking or incentive to spend as carefully as they would if buying for themselves. Gift givers cannot always be sure that you do not already have the gift they have in their mind, nor do they know if someone else is planning to give you the same gift. Guessing receiver’s preferences is not so simple and if done badly, ties go unworn and books unread every year. Even if a gift is enjoyed, it may not be what the receiver would have bought had they spent the money themselves.

If I give you a 500 rupees gift card and you give me a 500 rupees e-certificate for Amazon no destruction of wealth has occurred even if very less investment has occurred. Suppose instead of giving gift cards and e-certificates I give you an expensive sweater that you might not like because of its color or fitting, and you give me a fancy bag for which I have no use. We both might think that the other has terrible taste. But certainly effort and money went into the purchase. This ultimately leads to inefficient spending. The market failure of Christmas is when other people spend money on our behalf. The best person to buy things for you is you. The gift receiver could have attained a higher utility level if they had simply been given the corresponding amount of money in cash, leaving it up to them what to buy with it. It can at best be equally good, if the giver buys exactly what the recipient would also have bought.

Using surveys from economics students at Yale, Joel Waldfogel, an economist, estimated this ‘dead-weight loss of Christmas’ is somewhere between 10 and 33 per cent of the cost of presents.Other dead-weight losses include the effects of Christmas on the environment. Material gifts impose cost for upkeep and storage and contributing to clutter.

Sentiment Value

There is a more powerful argument for gift giving, is a process that adds value to an item over and above what it would otherwise be worth to the gift receiver. A gift’s worth is not only a function of its price, but also of the giver sentiments and the circumstances in which it is given. A wedding ring is more valuable to its owner or the one to whom owner gifts that ring than to a jeweler. The imprint of a child’s hand on dried clay is priceless to his grandparents. Moreover, not only can giving gifts add value for the receiver but it can also be fun for the giver too.

The lesson for gift givers is to try hard to guess the preferences of the gift receiver and then choose a gift that will have a high sentimental value as well as have maximum utility for the giver. As economists have studied hard to tell you, it’s the thought that counts.



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