Engel's Law, Curve, and Coefficient Explained

What Is Engel's Law?

Engel's Law is an economic theory put forth in 1857 by Ernst Engel, a German statistician. It states that the percentage of income allocated for food purchases decreases as a household's income rises, while the percentage spent on other things (such as education and recreation) increases.

Key Takeaways

  • Engel's Law is a 19th-century observation that as household income increases, the percentage of income that a household spends on food will decline.
  • In part, this is because the amount and quality of food that a family can consume is fairly limited.
  • As food spending declines on a relative basis, households spend a greater portion of their income on other things, such as education and recreation.

Understanding Engel's Law

In the mid 19th century, Ernst Engel published a study based on the expenditures of Belgian families. He divided them into three groups: "on relief," "poor but independent," and "comfortable." He then broke down their expenditures for food, clothing, housing, education, recreation, and other spending categories.

Engel found that the poorer the group, the greater the percentage of their budget that went to food, while a lesser percentage went, for example, to clothing and education.

That finding soon became known as Engel's Law. English translations of Engle's Law vary slightly, but are usually expressed as either:

"The poorer a family, the greater the proportion of its total expenditure that must be devoted to the provision of food."

Or, "The poorer is a family, the greater is the proportion of the total outgo which must be used for food. . . . The proportion of the outgo used for food, other things being equal, is the best measure of the material standard of living of a population."

Engel's insight was extended to whole countries by arguing that the wealthier a nation, the smaller the proportion of its labor and capital that will have to go toward food production and the more it can devote to manufacturing and services, resulting in a more advanced economy.

Engel's Law Today

Engel's Law remains a fundamental principle of economics today and underlies many economic and social policies around the world, including anti-poverty programs.

In the 20th and 21st centuries, expenditure categories have grown to include many things that weren't around in Engel's day (automobiles, health insurance, and mobile phones, for example), but the principle remains the same: Once families have met their food needs, they have money to spend on other things, some of which (education, for example) may lead to even greater financial security and affluence.

Example of Engel's Law

Suppose a family with an annual household income of $50,000 spends 25% of their income on food, or $12,500. If their income doubles to $100,000, it is unlikely that they will spend $25,000 (25%) on food, although they may spend somewhat more than they had been spending.

As the late MIT economist Paul A. Samuelson points out in his widely used college textbook, Economics:

"As income increases, expenditures on many food items go up. People eat more and eat better. They shift away from cheap, bulky carbohydrates to more expensive meats and proteins—and to milk, fruit, vegetables, and labor-saving processed foods. There are, however, limits to the amount of money that people will spend on food when their incomes rise."

What Is an Engel Curve?

An Engel Curve is a graphic representation of Engel's Law, showing the relationship between household income and spending on a particular good or service.

What Is Engel's Coefficient?

The Engel coefficient, based on Engel's Law, is a commonly used measure of a nation's standard of living. Some countries also use it to set their poverty line. The coefficient is arrived at by dividing food expenditures by total expenditures.

What Is Income Elasticity?

Income elasticity of demand is a measure of how demand for a particular product or service will rise as income rises. Luxury products, for example, have a higher elasticity of demand than so-called "normal goods" like food. Some items, referred to by economists as "inferior goods," see a decline in demand as income rises.

The Bottom Line

Engel's Law states that as a household's (or a nation's) income rises, the percentage of income spent on food decreases and the percentage spent on other goods and services increases. Developed in the mid-19th century by the German statistician Ernst Engel, it remains influential in economics and public policy today.

Article Sources
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  1. BYU Studies. "Engel's Law."

  2. Our World in Data. "Food Prices."

  3. Springer Nature. "Engel's Law in the Commodity Composition of Exports."

  4. American Economic Association. "Retrospectives: Engel Curves."

  5. Special Project on Poverty Statistics, United Nations Statistics Division. "Handbook on Poverty Statistics: Concepts, Methods and Policy Use," Page 100.

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