Consumption Function and Changes in Consumption Pattern In

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Consumption function and Changes in Consumption pattern

Transcript of Consumption Function and Changes in Consumption Pattern In

Page 1: Consumption Function and Changes in Consumption Pattern In
Page 2: Consumption Function and Changes in Consumption Pattern In

Keynes’ Consumption FunctionConsumption is an important component of

National IncomeConsumption function shows the total

expenditure which ceteris paribus, consumers will make on the purchase of different goods and services at different levels of income

Keynes calls it as ‘propensity to consume’It is the functional relationship between

income and consumptionIncome is the main determinant of

consumption

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Keynes’ Consumption FunctionReal consumption is a fairly stable function of

real incomeThere will be an increase in consumption as

income increases, but not as much as the increase in their income

C = a + bY where, C = Consumption, a = autonomous consumption, Y is income and b is slope of the consumption curve or Marginal Propensity to Consume (MPC)

Change in ConsumptionMPC = ------------------------------------ Change in Income

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Keynes’ Consumption FunctionAccording to him a rise in income will be

accompanied by rise in savings. The habitual standard of living has the first claim on income.

The difference between his actual income and the expense of his habitual standard of living is saving.

Average Propensity to Consume (C / Y) decreases as income increases both in the short as well as in the long run

0 < MPC < 1Short run MPC < Long run MPC

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S h o r t R u n C o n s u m p t i o n F u n c t i o n : 1 9 7 0 - 8 0

y = 0 .9 5 5 7 x + 3 6 4 7 .2

R 2 = 0 .9 9 7 8

0

2 0 0 0 0

4 0 0 0 0

6 0 0 0 0

8 0 0 0 0

1 0 0 0 0 0

1 2 0 0 0 0

1 4 0 0 0 0

0 5 0 0 0 0 1 0 0 0 0 0 1 5 0 0 0 0

In c o m e

Co

nsu

mp

tion

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L o n g R u n C o n s u m p t io n C u r v e

y = 0 . 7 2 8 5 x + 3 9 7 8 3

R 2 = 0 . 9 9 8 9

0

1 0 0 0 0 0 0

2 0 0 0 0 0 0

3 0 0 0 0 0 0

0 1 0 0 0 0 0 0 2 0 0 0 0 0 0 3 0 0 0 0 0 0 4 0 0 0 0 0 0

I n c o m e

Cons

umpt

i on

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A v e r a g e P r o p e n s i t y t o C o n s u m e

y = - 1 E - 0 7 x + 0 . 9 6 6 7

R 2 = 0 . 7 6 5 5

0

0 . 5

1

1 . 5

0 5 0 0 0 0 0 1 E + 0 6 2 E + 0 6 2 E + 0 6 3 E + 0 6 3 E + 0 6 4 E + 0 6

I n c o m e

AP

C

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Empirical EvidenceThe empirical evidence shows the

applicability of Keynes consumption function in the case of India for both short as well as long run

MPC is less than 1 in both the periodsAPC declines as income increasesBut only exception is that short run MPC>

long run MPC

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Alternative HypothesesDuesenberry – Consumption income ratio

depends on the current income to the peak income previously attained.

C = a + byt + byt-1

C= 41158.87 + 0.733yt– 0.006yt-1

(6.74) (-0.05)Brown argues that C/Y is not necessarily

constant because consumption depends on habit persistence among the consumers.

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Alternative HypothesesHe concludes that previous consumption

rather than previous income as a lagged variable in consumption function

C= 25494 + 0.405Yt + 0.488Ct-1

(5.77) (4.61)

Thus keynes assumption that consumtion-income ratio is non-proportional has been proved in Indian case. APC is not constant.

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Data Sources on Consumption Expenditure in IndiaNAS and NSSOThough many studies based their analysis

of changes in consumption pattern on NSSO, it is not free from limitations

Data from NSS household consumption expenditure surveys are available quinquiennally and annual suveys

The quinquiennial survey of 55th round departed from earlier surveys due to change in the reference periods for food and non-food categories (Himanshu, 2005)

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Changes in Indian Food BasketThe food consumption pattern in India is

diversifying towards high value commoditiesPer capita consumption of cereals, mainly

coarse cereals has worsened the nutritional status of the poor (Praduman, 2007)

Mittal (2007) argued that the increase in relative prices of cereals and diversification towards high-value food and changes in the tastes and preferences are responsible factors for the delcine

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Changes in Indian Food BasketChand (2003) has pointed out that

increase in prices of cereals is much higher than those of horticultural, milk and milk products

Decline in consumption of cereals is also due to rise in prices

The declining trend in the consumption of rice and wheat for the upper income group during 1983-1999 due to the consumption diversification effect

Murthy (2000) argued that tastes and preferences are important determinants of consumer demand analysis

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Changes in Indian Food BasketRise in income explains 3.74 percent, while

tastes and preferences explains 4.0 and 0.37 percent due to changes in prices- the decline in cereal consumption

Thus, despite increase in income, these factors explain the decline in cereal consumption in India

Over a period, the per capital annual consumption of edible oils, vegetables, fruits, milk, meat, fish, eggs and sugar has increased for both upper and bottom income groups

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Changes in Indian Food Basket- Rural and UrbanDietary pattern is converging and becoming

similar in natureIncreasing urbanisation of rural areas led to

penetration of urban lifestyle and thus narrowed down the differences (Jayathi Ghosh, 2003)

However, such convergence does not appear at disaggregated level

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Changes in Indian Food Basket-Across StatesHigher incidence of poverty is found in

Orissa (47.2%), Bihar (42.6%), MP (37.4), Assam (36.1) and UP (31.2%) in 1999-00.

It was found that poorer Indian states spent a larger portion of their budget on food as compared to other states.

Higher proportion of expenditure on low-calorie food

Consumption diversification is found among higher income groups of these states

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Calorie ConsumptionAnalysis of estimates of population below

threshold level of calorie, protein and fact reveal a different picture

A worsening of calorie and protein consumption in the bottom group of rural poor

Imbalances in food habits is visible as percentage of population below the threshold level of fat consumption declined between 1983-1999-00

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ConculsionsIncrease in income, urbanisation and

consumer perceptions regarding food quality and saftety effecting changes in the food-consumption pattern

Diversification towards oils, fruits, vegetables, milk and eggs

Though consumption of coarse cereals is affected, states such as Maharashtra, Gujarat and Rajsthan still consume more of them