Engel’s Law

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Understanding Engel’s Law

What Engel’s Law Says

Engel’s Law, formulated by Ernst Engel in 1857, states that as household (or national) income rises, the proportion of income spent on food falls, even if absolute food spending increases. Higher incomes shift consumption toward nonfood items such as education, recreation, health, and other services.

Key Takeaways

  • Poorer households spend a larger share of their budget on food than wealthier households.
  • Absolute food spending can rise with income, but its share of the budget declines.
  • The Engel coefficient (food expenditures ÷ total expenditures) is used to gauge living standards and sometimes to inform poverty thresholds.
  • An Engel curve maps how spending on a specific good changes with income.
  • Income elasticity distinguishes normal, inferior, and luxury goods based on how demand responds to income changes.

Historical Evidence

Engel studied Belgian families in the 19th century, grouping them by socioeconomic status and comparing expenditure patterns across categories (food, clothing, housing, education, recreation). He observed that the poorest families devoted the highest share of their budgets to food, a finding that became known as Engel’s Law.

Practical Example

If a family earning $50,000 spends 25% of income on food ($12,500), doubling income to $100,000 does not imply food spending will double to $25,000. They may spend somewhat more on food but a much smaller percentage of total income, reallocating additional income to other goods and services.

Measures and Concepts

  • Engel Curve: A graphical representation showing how spending on a particular good varies with income.
  • Engel Coefficient: The ratio of food expenditure to total expenditure; a higher coefficient indicates a lower material standard of living.
  • Income Elasticity of Demand: Measures the responsiveness of demand to income changes. Luxury goods have high positive elasticity; inferior goods have negative elasticity.

Relevance for Policy and Development

Engel’s Law helps explain structural changes in economies: as countries become wealthier, labor and capital move away from subsistence agriculture toward manufacturing and services. Policymakers and analysts use measures derived from Engel’s Law to:
* Assess living standards and food insecurity.
* Design anti-poverty programs and social safety nets.
* Forecast sectoral shifts in demand as incomes rise.

Modern Context

Spending categories have expanded (e.g., health insurance, transportation, communications), but the basic insight remains: once basic food needs are met, additional income tends to be spent on items that enhance long-term well-being and economic mobility. For example, the average U.S. consumer spent about 11.2% of disposable income on food in 2023.

Frequently Asked Questions

  • What is an Engel curve?
    A graph showing how expenditure on a specific good changes as income changes.

  • How is the Engel coefficient used?
    It gauges material living standards by comparing food spending to total spending; higher values suggest lower living standards.

  • Why use food share as a welfare indicator?
    Because basic nutritional needs are similar across populations, a high share of spending on food often signals financial strain and limited discretionary income.

Conclusion

Engel’s Law remains a foundational concept in economics: rising incomes reduce the share of expenditure devoted to food and increase spending on education, services, and other goods that contribute to a higher standard of living.