application of engels law to indian economy
DESCRIPTION
engels lawTRANSCRIPT
BY
COMPARING GDP vs CONSUMPTION
FROM 1990 TO 2007
APPLICATION OF ENGEL’S METHOD TO INDIAN ECONOMY
By,T. SAIRAM SINGHK.ROOPANJALIA.SANDEEPG.SANTOSHG.SRIKANTHK.MICHAEL JACKSON
BornMarch 26, 1821Dresden
Died
December 8, 1896 (aged 75)Serkowitz (now part of Radebeul)
Nationality German
FieldsStatistician and economist
Known forEngel curve and the Engel's law
INTRODUCTION
• An economic theory introduced in 1857 by Ernst Engel (German statistician).
• It states that the percentage of income allocated for food purchases decreases as income rises. As a household’s income increases, The percentage of income spent on food decreases while the proportion spent on other goods(such as luxury goods) increases
Engel’s law:
One application of this statistic is treating it as a reflection of the living standard of a country. Engels coefficient increases the country is by nature poorer, conversely a low Engel coefficient indicates a higher standard of living.
Example : A family that spends 25% of their income on food at an income level of $50000 will spend $ 12,500 on food. if their income increases to $ 1,00,000,its is not likely that they will spend $ 25000(25%) on food, but will spend a lesser percentage while increasing spending in other areas. As the country develops economically, the relative importance on agriculture declines.
Engel’s pronouncement of Engel’s law
According to Engel’s pronouncement of Engel’s law “The poorer is a family, the greater is the proportion of the total outgo which must be used for food…the proportion of the outgo used for food, other things being equal, is the best measure of the material standard of living of a population”(Engel, 1857 as reproduced in Stigler 1954)
Why And Where It Is Observed?
• The change in consumption pattern may be because of income, prices, taste or preference.
• 80% of the malnourished children come from country which has agricultural surplus.
Graphical Representation:
This graph shows that increase in income will lead ultimately to decrease in food share by Engel’s law
In this graph we can see the increase in Income and food expense but the growth in food expense is lesser than the increase in income
Countries are classified according to their income as:
1. Low income
2. Middle income
3. High income
Countries Food Clothing Housing Medical
Low income .485 .061 .135 .045
Middle income
.311 .055 .183 .061
High income .204 .051 .187 .095
Source: USDA Economic Research Service
Comparison of Countries respect to their spending pattern
A cross-country interpretation
Consumption of food becomes relatively less responsive to an increase in income as people become wealthier (other things held constant)
A one percent increase in income would lead to respectively a .85, .78 and .35 increase in consumption as indicated
Country Income Elasticity for Food
Congo Dem Rep .85
India .78
U.S .35
Implications Of Engel’s Law
As consumption of nourishment as a proportion of all consumption will tend to decline with increasing income, so also will the share of employment dealing with food and agriculture.
For poor countries a vibrant, efficient agricultural sector is relatively more important.
The poor will tend to have a more responsive demand to price changes than those with higher income. As the price of food rises, a person substitutes away from food and also decline in purchasing power also reduces food consumption.
Countries Food Medical Recreation
Congo Dem. Rep
-.863 -1.145 -2.778
India -.739 -1.170 -1.537
US -.297 -.902 -.930
Own price elasticity for Food, Health and Recreation
Challenge to Engel’s law-The Very Poor
Do the very poor act according to Engel’s law?
One argument is associated with the nutritional poverty trap.
Poor workers will, if they received additional income, spend it all on food so that they can work well the next day.
If they on average spend 70 percent of their budget on food and they spend every additional dollar on food, their budget share will rise with additional income violating Engel’s law.
Engel’s law application to Indian economy:
By considering GDP and
consumption expenditure
from the year
1990 to 2007
Gross domestic product (GDP): is the market value of all final goods and services produced within a country in a year.
GDP per capita is often considered an indicator of a country's standard of living.
GDP per capita is not a measure of personal income. Under economic theory, GDP per capita exactly equals the gross domestic income (GDI) per capita.
Particulars to be considered
Household final consumption expenditure is the market value of all goods and services, including durable products (such as cars, washing machines, and home computers), purchased by households.
It also includes payments and fees to governments to obtain permits and licenses.
It is a key component of aggregate demand.
Consumption:
YearsReal GDP per Capita
Consumption share of GDP per Capita
1990 1509.265642 57.644027571991 1541.539563 58.356249411992 1603.649673 57.939845431993 1670.504631 58.145704931994 1763.096342 57.716748521995 1906.669581 56.711716381996 1969.887694 59.232959921997 2075.233135 57.461518271998 2193.848067 57.390116561999 2395.610233 55.740849222000 2456.504418 55.87786519
Comparision between India / Real GDP per Capita and consumption ( Current Prices $)
YearsReal GDP per Capita
Consumption share of GDP per Capita
2001 2580.390037 56.66148675
2002 2650.857348 56.21331644
2003 2832.854578 56.18598808
2004 3053.03624 55.13094881
2005 3365.337457 54.01859188
2006 3711.872457 52.60904981
2007 4099.723878 51.40990843
Comparision between India / Real GDP per Capita and consumption ( Current Prices $)
0
500
1000
1500
2000
2500
3000
3500
4000
4500 Real GDP per Capita
Real GDP per Capita
YEARS
GD
P p
er
cap
ita in
dollar
GDP growth :
1990
1992
1994
1996
1998
2000
2002
2004
2006
46
48
50
52
54
56
58
60
Consumption Share of Real GDP
YEARS
CONSUMPTION in dollars
Consumption share in real GDP:
SUMMARY OUTPUT:
Regression Statistics
Multiple R : 0.937441148
R Square : 0.878795907
Intercept : 62.3619409
X Variable 1 : -0.002491202
Regression equation:
Consumption= coefficient – X.(real GDP)
Y=62.3619409-0.002491202.(GDP)
1000 1500 2000 2500 3000 3500 4000 450046
48
50
52
54
56
58
60
f(x) = − 0.00249120196130227 x + 62.3619408979715R² = 0.878795906590002
Consumption Share of Real GDP
GDP IN DOLLARS
Con
su
mp
tion
in
dollars
Graphical representation of consumption VS GDP
1990
1992
1994
1996
1998
2000
2002
2004
2006
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Consumption Share of Real GDP
Real GDP per Capita
Years
Perc
en
tag
e o
f G
DP
Percentage of real GDP consumed
It can be concluded that from the statistical approach of Engel’s law in the Indian economy we can say it is valid and this also shows the position of the country in development.
X Variable 1 : -0.002491202
Result:
Refinement of Engel’s Law
Engel's law is portrayed in the literature as a
stable and timeless relationship between
income changes and certain
types of household
consumption: food, clothing,
housing and leisure.
Refinement of Engel’s LawEngels Law Is generally considered as being perfectly shown to hold
empirically, but without clear theoretical foundations.
Furthermore, its simplicity masks uncertainty about its real meaning:
for example, if needs are endogenous, especially with respect to
changes in income, then on the intuitive grounds for the ‘law on the
scarcity of goods’ are not clear.
Secondly, there was a bias in estimating the law using survey data
raises problems about testing it empirically, usually done cross-
sectionally.
Now, by observing the present scenario of world economies we can conclude that Ernst Engels law is still valid and is applicable not just to Indian context but also to the world economies.
Conclusion:
r
S m o s
A I o s r
N c p a i
T h a n k sairam Singh
H a n d a
O e j e n
S l l e t
H I p h