Consumption Function And Changes In Consumption Pattern In

Keynes’ Consumption Function Consumption is an important component

of National Income Consumption 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 consumption Income is the main determinant of

Keynes’ Consumption Function Real consumption is a fairly stable function of real

income There 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 Consumption MPC = -----------------------------------Change in Income

Keynes’ Consumption Function According 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 < 1 Short run MPC < Long run MPC

Short Run Consumption Function: 1970-80

y = 0.9557x + 3647.2 2 R = 0.9978

140000 120000

Consumption

100000 80000 60000 40000 20000 0 0

50000

100000 Income

150000

Long Run Consumption Curve y = 0.7285x + 39783 2 R = 0.9989

3000000

Consumpti on

2000000 1000000 0 0

1000000 2000000 3000000 4000000 Income

Average Propensity to Consume y = -1E-07x + 0.9667 2 R = 0.7655

1.5

APC

1 0.5 0 0

500000 1E+06 2E+06 2E+06 3E+06 3E+06 4E+06 Income

Empirical Evidence The 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 periods APC declines as income increases But only exception is that short run MPC> long run MPC

Alternative Hypotheses Duesenberry – 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 Hypotheses He 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 consumtionincome ratio is non-proportional has been proved in Indian case. APC is not constant.

Data Sources on Consumption Expenditure in India NAS and NSSO Though 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 Basket The food consumption pattern in India is

diversifying towards high value commodities Per 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 Basket Chand (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 Basket Rise in income explains 3.74 percent,

while tastes and preferences explains 4.0 and 0.37 percent due to changes in pricesthe 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 BasketRural and Urban Dietary pattern is converging and becoming

similar in nature Increasing 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 BasketAcross States Higher 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 lowcalorie food Consumption diversification is found among higher income groups of these states

Calorie Consumption Analysis 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

Conculsions Increase 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