Consumption Function and Changes in Consumption Pattern In
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Transcript of 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
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
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
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
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
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
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
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.
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.
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)
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
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
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
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
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
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
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