Answer to Question #160743 in Economics for PIXIE

Question

Part 1 The evidence below is based on data from a household budget survey collected in the 1990s in what is now the Czech Republic. A cross sectional survey of close to four thousand households collected detailed information on spending. Annual spending on nondurable and semidurable goods has been divided into six categories as follows: meat and fish; other food items; alcoholic drinks; clothes and shoes; energy, transport and household products; culture and entertainment. Statistics on share of total household spending for each of the six items are in Table 1 below: Table 1: Budget Shares: Whole Sample Mean Meat and fish .138 Other food items .326 Alcoholic drinks .045 Clothes and shoes .114 Energy, transport, etc .195 Culture and entertainment .182 These budget shares are plotted against the log of total household spending (in Kˇc per year) in Figure 1. ECON0013 1 TURN OVER Figure 1: Variation of budget shares with total budget The red line on each picture is a best-fitting straight-line relationship between budget share and the log of total spending. If we let w h i denote the budget share of the ith good in the hth household and y h be total spending of the household then we can suppose that each household has as an Engel curve relationship w h i = α h i + βi ln y h . Here βi denotes the slope of the Engel curve for the ith good. Note that we assume that this slope is the same for all households. This slope tells us how changes in total spending affect the way any household divides up its budget. The other parameter α h i denotes the intercept of the Engel curve for the ith good. We allow this to be ECON0013 2 CONTINUED different for each household h, recognising that there are many other things that affect household spending decisions, some of them observed like demographic characteristics and some unobserved like idiosyncratic taste variation, and that consequently all households do not lie on a common line. The position of the red line on the figure can be thought of as an average relationship taken across all these other influences. Your task in this project is to think about the nature of the relationship of budget share to total budget and to other influences such as demographic characteristics. Table 2 reports the results of regressing budget shares on the log of total household spending and on demographic characteristics of the household. Household size is the number of people in the household, Child share is the proportion of those people who are children, Age is the age of the head of household in years and Rural is a variable taking the value 1 for households living in rural areas. Table 2: Budget Share Regressions Meat and fish Other food items Alcoholic drinks ln Household size 0.040 0.011 0.012 Child share -0.066 0.046 -0.048 Age/100 0.116 0.148 -0.021 Rural 0.025 0.020 0.006 ln Total spending -0.015 -0.038 0.003 Constant 0.223 0.643 0.022 Clothes and shoes Energy, transport, etc Culture and entertainment ln Household size 0.001 -0.043 -0.022 Child share 0.002 0.013 0.051 Age/100 -0.132 0.021 -0.133 Rural -0.008 -0.011 -0.031 ln Total spending 0.020 -0.018 0.049 Constant -0.038 0.415 -0.266 ECON0013 3 TURN OVER Write a short commentary on these results. • Discuss the pattern of luxuries and necessities. • Discuss why it makes sense to include demographic and other effects, how these can be interpreted and what you learn from these results. • Suggest other effects that you think it would have been interesting and informative to have included

Answer 1

Income, consumption and wealth (ICW) determine the financial situation and material well-being of households and individuals.

As affluent households specialize in different expenditure categories, this implies that rising income tends to expand the variety of goods and services that is consumed by the overall population of households.