Engel’s Law, Lorentz Curve & Kuznet Curve

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Engel’s Law

  • Engel's Law is an economic theory introduced in 1857 by Ernst Engel, a German statistician.
  • stating that the percentage of income allocated for food purchases decreases as income rises.
  • As a household's income increases, the percentage of income spent on food decreases while the proportion spent on other goods (such as luxury goods) increases.
  • Ex: Income 10,000, Spent for food is 6,000 (60% Spent). If income is 30,000, spent on food is 6,000 (20% Spent) or Reduce food cost (like PDS). PDS give rice, dhal & Sugar, SO spent on food is reduce. Ex: 10,000 income & Govt give food in PDS system, so spent on food reduced, high disposal income in hands.

Lorentz Curve
  • The Lorenz curve is a graphical representation of income inequality or wealth inequality developed by American economist Max Lorenz in 1905.
  • The graph plots percentiles of the population on the horizontal axis according to income or wealth. It plots cumulative income or wealth on the vertical axis.
  • so that an x-value of 45 and a y-value of 14.2 would mean that the bottom 45% of the population controls 14.2% of the total income or wealth.
Gini Coefficient
  • The Gini Coefficient, which is derived from the Lorenz Curve, can be used as an indicator of economic development in a country.
  • The Gini Coefficient measures the degree of income equality in a population.
  • The Gini Coefficient can vary from 0 (perfect equality) to 1 (perfect inequality).
  • A Gini Coefficient of zero means that everyone has the same income, while a Coefficient of 1 represents a single individual receiving all the income.
Kuznet Curve
  • Kuznets’ work on economic growth and income distribution led him to hypothesize that industrializing nations experience a rise and subsequent decline in economic inequality, characterized as an inverted "U" – the “Kuznets curve."   
 

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