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Engels Law

Harvard economist Hendrik Houthakker: "Of all the empirical regularities observed in economic data, Engel's Law is probably the best established." Based on surveys of 153 Belgian families' budgets and expenditure patterns in 1857, Ernst Engel formulated the empirical relationship which became known as Engel's Law, which he stated as follows: "The poorer is a family, the greater is the proportion of the total outgo which must be used for food.. With rising incomes, the share of expenditures for food products declines. In economic terms, this means that the income elasticity of demand for food is relatively low. The degree to which a demand for a good changes with respect to a change in income depends on whether the good is a necessity or a luxury. The demand for necessities will increase with income, but at a slower rate. This is because consumers, instead of buying more of only the necessity, will want to use their increased income to buy more of a luxury. During a period of increasing income, demand for luxury products tends to increase at a higher rate than the demand for necessities. It is the law which shows the relationship between various quantities of a good a consumer is willing to purchase at varying income levels. In other words, the lower a family's income, the greater is the proportion of it spent on food. The law holds within a country (the poor spend a higher proportion of their income on food than the rich), and at the aggregate level (poor countries spend more of their GNP on food than wealthy ones. The expenditure on food is around 10% in United States but can be over 50% in very poor countries. This prompted Engel to conclude that 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." It should be noted that although share of expenditure on food decreases with income, total expenditure on food rises as incomes rises. People buy higher quality food products as their income increases. The consumption of starchy foods and coarse grains (like jowar and bajra) decreases as income increases. But the proportion of fruits, fresh vegetables, dairy products and animal foods increases as income increases. In short, Engels Law can be described with three components (the third was added by Bennett): 1. As income increases, demand for food increases. (this implies that food is not an inferior product) 2. As income increases, the proportion spent on food decreases (thus food is a necessity) 3. As income increases, the composition of food basket changes (people prefer to have higher quality of food).