Top Banner
BY COMPARING GDP vs CONSUMPTION FROM 1990 TO 2007 APPLICATION OF ENGEL’S METHOD TO INDIAN ECONOMY By, T. SAIRAM SINGH K.ROOPANJALI A.SANDEEP G.SANTOSH G.SRIKANTH MICHAEL JACKSON
31
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Page 1: Engel's law

BY

COMPARING GDP vs CONSUMPTION

FROM 1990 TO 2007

APPLICATION OF ENGEL’S METHOD TO INDIAN ECONOMY

By,T. SAIRAM SINGHK.ROOPANJALIA.SANDEEPG.SANTOSHG.SRIKANTHMICHAEL JACKSON

Page 2: Engel's law

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

Page 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

Engel’s law:

Page 4: 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.

Page 5: Engel's law
Page 6: Engel's law

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)

Page 7: Engel's law

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.

Page 8: Engel's law

Graphical Representation:

This graph shows that increase in income will lead ultimately to decrease in food share by Engel’s law

Page 9: 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

Page 10: Engel's law

Countries are classified according to their income as:

1. Low income

2. Middle income

3. High income

Page 11: Engel's law

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

Page 12: Engel's law

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

Page 13: Engel's law

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.

Page 14: Engel's law

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

Page 15: Engel's law

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.

Page 16: Engel's law

Engel’s law application to Indian economy:

By considering GDP and

consumption expenditure

from the year

1990 to 2007

Page 17: Engel's law

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

Page 18: Engel's law

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:

Page 19: Engel's law

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 $)

Page 20: Engel's law

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 $)

Page 21: Engel's law

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 :

Page 22: Engel's law

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:

Page 23: Engel's law

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)

Page 24: Engel's law

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

Page 25: Engel's law

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

Page 26: Engel's law

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:

Page 27: Engel's law

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.

Page 28: Engel's law

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.

Page 29: Engel's law
Page 30: Engel's law
Page 31: Engel's law

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: