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What Is Engel’s Law?
Engel’s Law is an economic theory put forth in 1857 by Ernst Engel, a German statistician suggests that as a household’s income rises, the percentage spent on food decreases, while spending on other items, like education, recreation, additional amenities, and building wealth, increases.
Key Takeaways
- Engel’s Law, formulated by German statistician Ernst Engel in 1857, explains that as household income rises, the percentage of income spent on food decreases, while spending on other categories like education and recreation increases.
- Engel’s findings were based on a study of Belgian families divided into socioeconomic groups, revealing that poorer households allocate a higher proportion of their budgets to food than wealthier families.
- The Engel coefficient, derived from Engel’s Law, measures a nation’s standard of living by calculating the ratio of food expenditures to total expenditures and is sometimes used to set poverty lines.
- An Engel Curve graphically represents Engel’s Law, illustrating the relationship between household income and spending on specific goods or services.
- Engel’s Law remains a fundamental economic principle informing global social and economic policies, influencing anti-poverty programs, and analyzing consumer behavior patterns.
How Engel’s Law Affects Household Spending
In the mid 19th century, Ernst Engel published a study based on the expenditures of Belgian families. He divided them into three groups: “on relief,” “poor but independent,” and “comfortable.” He then broke down their expenditures for food, clothing, housing, education, recreation, and other spending categories.
Engel observed that poorer groups spent a larger percentage of their budget on food and less on clothing and education.
That finding soon became known as Engel’s Law. English translations of Engle’s Law vary slightly, but are usually expressed as either:
“The poorer a family, the greater the proportion of its total expenditure that must be devoted to the provision of food.”
Or, “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’s idea was applied to nations, suggesting that as a country becomes wealthier, it devotes less labor and capital to food production and more to manufacturing and services, leading to a more advanced economy.
11.2%
The average U.S. consumer’s food spending in 2023, as a percentage of their disposable income.
The Relevance of Engel’s Law in Modern Economics
Engel’s Law remains a fundamental principle of economics today and underlies many economic and social policies around the world, including anti-poverty programs.
In the 20th and 21st centuries, expenses expanded to include items like cars, health insurance, and mobile phones. However, once food needs are met, families can spend on other things, like education, that boost financial security and affluence.
Practical Illustrations of Engel’s Law
Suppose a family with an annual household income of $50,000 spends 25% of their income on food, or $12,500. If their income doubles to $100,000, it is unlikely that they will spend $25,000 (25%) on food, although they may spend somewhat more than they had been spending.
As the late MIT economist Paul A. Samuelson points out in his widely used college textbook, Economics:
“As income increases, expenditures on many food items go up. People eat more and eat better. They shift away from cheap, bulky carbohydrates to more expensive meats and proteins—and to milk, fruit, vegetables, and labor-saving processed foods. There are, however, limits to the amount of money that people will spend on food when their incomes rise.”
What Is an Engel Curve?
An Engel Curve is a graphic representation of Engel’s Law, showing the relationship between household income and spending on a particular good or service.
What Is Engel’s Coefficient?
The Engel coefficient, based on Engel’s Law, is a commonly used measure of a nation’s standard of living. Some countries also use it to set their poverty line. The coefficient is arrived at by dividing food expenditures by total expenditures.
What Is Income Elasticity?
Income elasticity of demand is a measure of how demand for a particular product or service will rise as income rises. Luxury products, for example, have a higher elasticity of demand than so-called “normal goods” like food. Some items, referred to by economists as “inferior goods,” see a decline in demand as income rises.
Why Is the Percentage of Income Spent on Food a Good Measure in Economics?
Economists use the percentage of income a family spends on food as a good measure of financial security. Because all humans have similar nutritional needs, the absolute cost of feeding a family is roughly equivalent across income brackets. Consequently, a family that spends a high percentage on food might be a sign of financial precarity or insecurity. Note, however, that this is not a perfect comparison, since it is possible for the wealthy to dine more extravagantly than less well-off families.
The Bottom Line
Engel’s Law states that as a household’s (or a nation’s) income rises, the percentage of income spent on food decreases and the percentage spent on other goods and services increases. Developed in the mid-19th century by the German statistician Ernst Engel, it remains influential in economics and public policy development today.
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