1. Engel's law is an observation in economics stating that as income
rises, the proportion of income spent on food falls, even if actual expenditure
on food rises. In other words, the income elasticity of demand of food is
between 0 and 1. The law was named after the statistician
Ernst Engel (1821–1896).
What
is Engel’s Law?
Engel’s Law is named after the statistician
Ernst Engel, who was the first to investigate the relationship between income
and spending on food in 1857.
The law states that as income rises, the
proportion of income that is spent on food decreases. This proportion, also
called the Engel’s Coefficient, means that consumers increase
their spending on food by a smaller amount than the increase in
income. For example, a household which sees their income double is
unlikely to double their spending on food.
What
is its application?
The law implies that poor households spend a
greater proportion of their income on food than higher-income households. When
the costs of food increase, it will hit the poorest the hardest. This is
because they already spent a large proportion of their income on food so when
food prices increase further, they may not be able to feed themselves
adequately.
Engel’s law can also be used as an indicator
of living standards in different countries. If the Engel coefficient is high,
it means the country is poorer and has a lower standard of living. The United
Nations (UN) uses the Engel coefficient to show living standards:
·
A coefficient above 59
percent represents poverty
·
50-59 percent, indicates
barely meeting daily needs
·
40-50 percent, a
moderately well-off standard of living;
·
30-40 percent, a
well-to-do standard of living;
·
below 30 percent,
represents a wealthy life.
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