Chapter 6: Engel Curves
Ross Williams Engel curves are the diagrammatic representation of how expenditure on a commodity (or quantity consumed) varies with income or total expenditure. The name derives from the nineteenth century work of the German statistician Ernst Engel. Using survey data from working-class Belgian households, Engel (1857) observed a number of regularities between expenditure on different commodities and income or total expenditure. In particular he observed that while expenditure on food increased with total household expenditure it fell as a share of total expenditure. This empirical regulatory has been observed for households in many countries and over time at the national level and has become known as Engel’s Law. The early estimates of Engel curves from budget studies are surveyed in Stigler (1954) and Houthakker (1957). It is usual to use total expenditure rather than income as a measure of resources in estimating Engel curves, although total expenditure is often loosely referred to as ‘income’, paralleling the treatment used in standard consumer demand analysis. Total expenditure is more stable than income and can be interpreted as encompassing aspects of permanent income. As a practical matter, household budget studies frequently do not record income, or if they do, the estimates of income often suffer from significant measurement bias. The dependent variable in an Engel curve can be expressed in either quantity or expenditure terms. If consumers all face the same set of prices, which is the usual assumption in cross-section studies, the two curves have identical shapes. In practice, the data usually...
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