Application of engels law to indian economy

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Application of engels law to indian economy

  1. 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. 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. 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. 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.
  5. 5. 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)
  6. 6. 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.
  7. 7. Graphical Representation: This graph shows that increase in income will lead ultimately to decrease in food share by Engel’s law
  8. 8. 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
  9. 9. Countries are classified according to their income as: 1. Low income 2. Middle income 3. High income
  10. 10. 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
  11. 11. 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
  12. 12. 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.
  13. 13. 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
  14. 14. 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.
  15. 15. Engel’s law application to Indian economy: By considering GDP and consumption expenditure from the year 1990 to 2007
  16. 16. 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.
  17. 17. 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.
  18. 18. 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
  19. 19. 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
  20. 20. 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
  21. 21. 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
  22. 22. 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)
  23. 23. 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
  24. 24. 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
  25. 25. 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
  26. 26. 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.
  27. 27. 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.
  28. 28. 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.
  29. 29. 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 I p h H

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