Discover the Influence of Engel’s Law on Household Spending Patterns
Engel’s Law, introduced in 1857 by German statistician Ernst Engel, describes a fundamental economic principle: as a household’s income increases, the proportion of its income spent on food declines, while its spending on other categories rises.
Key Takeaways
- Engel’s Law observes that households spend a smaller percentage of their income on food as their income increases.
- Household consumption of food is limited both in amount and quality, leading to a shift in spending to other areas as income grows.
- Higher-income households tend to allocate more of their income to education, recreation, and other services.
Gaining Insight via Engel’s Law
In the 1850s, Ernst Engel analyzed the expenditure patterns of Belgian families, categorizing them based on their economic status. Engel found that families in lower income groups spent a larger portion of their budget on food, with reduced spending on items like clothing and education. This observation has since been coined as Engel’s Law.
The essence of Engel’s Law is often summarized as:
“The poorer a family, the greater the proportion of its total expenditure that must be devoted to the provision of food.”
Engel extrapolated this observation to entire nations, suggesting that developing economies allocate a larger share of their resources to food production, unlike wealthier nations that can invest more in manufacturing and services.
Continued Relevance of Engel’s Law
Today, Engel’s Law underpins various economic and social policies, impacting anti-poverty programs and resource allocation strategies globally. While contemporary expenditure categories have evolved to include items such as vehicles, healthcare, and technology, the fundamental insight remains: Once basic needs like food are met, families have additional income to spend on other goods and services, fostering financial growth and stability.
Example Illustrating Engel’s Law
Consider a household with an annual income of $50,000 that allocates 25% or $12,500 to food. If their income rises to $100,000, their food expenditure is unlikely to double to $25,000 while a modest increase is likely. Nobel laureate and economist Paul A. Samuelson elucidates this through his writings, explaining that:
“As income increases, expenditures on many food items go up…However, there are limits to the amount of money people will spend on food as their incomes rise.”
What Is an Engel Curve?
An Engel Curve graphically represents Engel’s Law, illustrating the relationship between household income and spending on various goods and services.
What Is Engel’s Coefficient?
The Engel Coefficient measures a nation’s standard of living by comparing food expenditures to total household expenditures. It is often used to determine poverty levels.
What Is Income Elasticity?
Income elasticity of demand gauges how demand for goods and services changes in response to income fluctuations. Luxury goods typically exhibit higher elasticity compared to everyday essentials or ’normal goods’. Items categorized as ‘inferior goods’ may see demand drop as income rises.
The Essence of Engel’s Law
Engel’s Law highlights a crucial economic truth: as income rises, less is spent proportionately on food, shifting excess spending capacity to other sectors. Formulated by Ernst Engel in the 19th century, this principle continually influences contemporary economic policies and household economic behavior.
Related Terms: Engel Curve, Engel Coefficient, Income Elasticity, Advanced Economy, Inferior Goods.
References
- BYU Studies. “Engel’s Law”.
- Our World in Data. “Food Prices”.
- Springer Nature. “Engel’s Law in the Commodity Composition of Exports”.
- American Economic Association. “Retrospectives: Engel Curves”.
- Special Project on Poverty Statistics, United Nations Statistics Division. “Handbook on Poverty Statistics: Concepts, Methods and Policy Use”, Page 100.
