engels law

1. BY
COMPARING GDP vs CONSUMPTION
FROM 1990 TO 2007
By,
T. SAIRAM SINGH
K.ROOPANJALI
A.SANDEEP
G.SANTOSH
G.SRIKANTH
K.MICHAEL JACKSON

2. Born
March 26, 1821
Dresden
Died
December 8, 1896
(aged 75)
Serkowitz (now
part of Radebeul)
Nationality
German
Fields
Known for
Statistician and
economist
Engel curve and the
Engel's law
INTRODUCTION

3. EngEl’s law:
• 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

4. 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.

6. 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)

7. 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.

8. Graphical Representation:
This graph shows that increase in income will lead ultimately to decrease in
food share by Engel’s law

9. 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

10. Countries are classified
according to their income as:
1. Low income
2. Middle income
3. High income

11. Comparison of Countries respect
to their spending pattern
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

12. 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

13. 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.

14. 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.
Own price elasticity for Food, Health and Recreation
Countries
Food
Medical
Recreation
Congo Dem. Rep
-.863
-1.145
-2.778
India
-.739
-1.170
-1.537
US
-.297
-.902
-.930

15. 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.

16. Engel’s law application to Indian
economy:
By considering GDP and
consumption expenditure
from the year
1990 to 2007

17. Particulars to be considered
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.

18. Consumption:
 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.

19. Comparision between India / Real GDP per
Capita and consumption ( Current Prices $)
Years
Real GDP
Consumption share of GDP
per Capita
per Capita
1990
1509.265642
57.64402757
1991
1541.539563
58.35624941
1992
1603.649673
57.93984543
1993
1670.504631
58.14570493
1994
1763.096342
57.71674852
1995
1906.669581
56.71171638
1996
1969.887694
59.23295992
1997
2075.233135
57.46151827
1998
2193.848067
57.39011656
1999
2395.610233
55.74084922
2000
2456.504418
55.87786519

20. Comparision between India / Real GDP per
Capita and consumption ( Current Prices $)
Years
Real 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

21. GDP growth :
Real GDP per Capita
4500
4000
GDP per capita in dollar
3500
3000
2500
Real GDP
per
Capita
2000
1500
1000
500
0
1990 1992
1994 1996
1998 2000
2002 2004
YEARS
2006

22. Consumption share in real GDP:
i
n
60
Consumption
Share of Real
GDP
58
d
o
l
l
a
r
s
56
54
52
50
48
46
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
C
O
N
S
U
M
P
T
I
O
N
YEARS

23. 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)

24. Graphical representation of
consumption VS GDP
Consumption Share of Real GDP
60
y = -0.002x + 62.36
R² = 0.878
Consumption in dollars
59
58
57
56
55
54
53
52
51
0
1000
2000
3000
GDP IN DOLLARS
4000
5000

25. Percentage of real GDP consumed
100%
Consumption Share of
Real GDP
Percentage of GDP
99%
98%
97%
Real GDP per Capita
96%
95%
94%
1990 1992 1994 1996 1998 2000 2002 2004 2006
Years

26. Result:
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

27. 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.

28. Refinement of Engel’s Law
Engels 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.

31. Conclusion:
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.

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