Fitting of Engel Curve: Rural Maharashtra

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Fitting of Engel Curve: Rural Maharashtra
Managerial Economics I: Section D Group 6

Completed Under the Guidance of
Prof. Kaushik Bhattacharya
September 2011

Indian Institute of Management, Lucknow
Submitted on September 5th, 2012

Executive Summary

This study aims to estimate and analyze the relationship between the monthly per capita expenditure on food and the monthly per capita total expenditure for households in rural Maharashtra. This relation is estimated by using the Engel Curve Model which proves that as the income levels rise the percentage expenditure on food items decreases.

The National Sample Survey Organisation (NSSO) conducted an all-India survey of households and unorganised service enterprises in the 63rd round of NSS during July 2006-June 2007. Surveys on consumer expenditure are being conducted once in every five years on a large sample of households from the 27th round (October 1972 – September 1973). For this project Data from the 63rd Round of the National Sample Survey was used as a sample for analysis. The regression analysis was carried out using Linear, Working-Lesser and Double Log Models. The income elasticity was calculated in each case which confirmed the fact that food is a necessity good.

Qualitative factors such as seasonality, occupation and social group were also incorporated into the regression analysis using dummy variables. A multivariate regression analysis revealed the prominence of occupation as a relatively more significant factor compared to the others factors. The analysis is subject to certain limitations due to the assumptions made with the most primary assumption being that the total expenditure on all goods is representative of the income of the individual. Other limitations arising out of the content of the survey have also been listed.

Contents
Executive Summary2
Introduction4
Understanding the Data6
Data Collection6
Data processing6
Function Formulation6
Regression Analysis7


Introduction
The nature of a particular good can be determined by an important parameter known as Income elasticity which helps us classifying the good as either inferior, a necessity or luxury. This parameter allows us to predict what goods will be determined by a society during various stages of development and provide insights into the behaviour of various sections of society to that good. In today’s economic scenario Income elasticity of food in particular is of major significance. From a production perspective, it is important to determine the relationship between the food expenditure and income. This will help in predicting the demand in a growing economy and thus reduce the demand-supply gap. Form a policy perspective, the income elasticity becomes all the more important as government aims to have an inclusive development. Knowing the income elasticity with respect to food expenditure will help in framing policies which fulfil their aim of better economy. Income elasticity can be estimated empirically through Demand curves and Engel Curves. Engel curves describe how household expenditure on particular goods or services depends on household income. The name comes from the German statistician Ernst Engel (1821–1896) who was the first one to investigate this relationship systematically in an article published about 150 years ago. The best-known single result from the article is “Engel’s law,” which states that the poorer a family is, the larger the budget share it spends on nourishment. Engel curves may also depend on demographic variables and other consumer characteristics. Empirical Engel curves are close to linear for some goods, and highly nonlinear for others. Engel curves are used for equivalence scale calculations and related welfare comparisons, and determine properties of demand systems such as agreeability and rank.

Engel curves for normal goods...
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