Beruflich Dokumente
Kultur Dokumente
INTRODUCTION
Contents
1.1
1.2
1.2.1
1.3
1.4
1.4.1
1.4.2
1.5
1.6
1.6.1
1.7
1.8
1.9
1.10
1.11
1.12
1.13
1.13.1
1.13.2
1.14
Introduction
Consumption Pattern
Determinants of consumption pattern
Statement of the Problem
Objectives of the Study
General objectives
Specific objectives
Hypotheses
Methodology and Data Sources
Sample design
Data Gathering Instruments and Data Collection
Data Management and Analysis
Limitations of the Study
Scheme of the Study
History of the Analysis of Consumption
Consumption : Theoretical Developments
Consumer Behaviour Theory
Micro economic theories
Macro economic theories
New Model
References
INTRODUCTION
1.1 Introduction
Human life is nourished and sustained by consumption. The abundance of
consumption is the life blood of human development. Just as the sun is the centre
of the solar system, consumer is the prime mover of the economic system.
Consumer and consumer behaviour have existed for ages ever since homohabilis
appeared on earth. Consumer is the king or sovereign in the economic empire.
Consumption habits are determined by a complex set of socio-economic, cultural,
religious, psychological and environmental factors. Typically, a countrys
consumption pattern and its effects reveal a clear picture of its standard of living,
poverty level, human development and the nature of its economic growth.
Economic growth is affected by aggregate demand. If the aggregate
demand is growing fast, the economy is likely to be boosting and
conversely
there will be recession in the economy. Consumer expenditure is the total amount
spent by the consumer on produced goods and services and consumer expenditure
is influenced to a great extent by income. A change in disposable income leads to
a movement along the consumption function, but a change in other determinants
of consumer spending will shift the entire consumption function. In this context,
Goyal (1994) viewed that consumption pattern become a habit. As income levels
rise with development and people move into higher income brackets, consumption
levels do not rise continuously (Annapoorani et al, 2003).
Simon Kuznets,( 1995) identified the economic growth of a nation with a
sustained increase in per capita or per worker product, most often accompanied by
an increase in population and sweeping structural changes. According to him
economic growth involves industrialization, urbanisation and change in the
relative economic position of groups within the nation. These changes influence
the level of consumption and consumption pattern in an economy. This means that
there exist a close relationship between consumption and economic growth.
Different theories of consumption indirectly explain the relationship between
1.2.1
such variations in consumption (Kulkarny, 1991). They are changes in the taste,
habits and preferences of the family, size of the family, income of the household,
the base of the standard of living, geographical background, current and expected
prices in the market, social and religious structure such as caste, tradition etc. age
and education of the head of the household, composition and occupation of family,
life style, availability of consumer goods in installments, influence of
advertisement, interest rates, expected future earnings,. change in wage level,
windfall gain or loss, change in future expectation, change in rate of interest,
holding of liquid assets, distribution of income and wealth between the rich and the
poor, consumer credit, attitude towards savings, fiscal and monetary policy of the
government etc. (Modigliani, 1949). Social attitudes and cultural patterns among
people influence their patterns of consumption. Increased pressure on consumption
is also exercised through the institution of advertisement.
Geographical location of the population plays some role in the consumption
function (Anthony, 1974). Demonstration effect is a more likely characteristic of
cities than of the rural countryside. The urbanization of a country may be
accompanied by pressures to greater consumption and less savings (Edwin, 1993).
Propensity to consume is also influenced by the size of the family. With an
increase in family size, the propensity to consume increases due to increased
demand for food, clothing and other necessities of life (Ashok and Jagadeswara,
1985). Every aspect of household economic behaviour is significantly correlated
with the presence of children in the household. Children affect the allocation of a
given family budget; they affect the household demand patterns in a well-defined
way (Martin and Anna-Maria, 1996).
1.3 Statement of the Problem
The world consumption has expanded at an unprecedented pace over the
20th century with the aggregate consumption expenditure reaching $24 trillion in
1998 which is twice that of 1975 and six times that of 1950. In 1900 real
expenditure was barely $1.5 trillion. The HDR (1998) highlights a new dimension
of current global consumption of goods and services. The report showed that with
the globalization of markets, demand for luxury items and services are increasing
even in traditionally poor countries. Consumption boom could be witnessed
across the world resulting from phenomenal progress of technology and business
management. Due to the expansion of consumer expenditure in an unprecedented
manner more people are better fed and housed than before. But the poorest 20%
of the worlds population is left out of the consumption explosion. The distinction
between necessaries and luxuries is fast disappearing. Household debt particularly
consumer credit is growing while household savings are falling in several
industrial and developing countries.
The consumption pattern in India underwent a sweeping structural change
and now it tends towards assuming a new mobility (Sooryamoorthy , 1997). India
has been projected as the next consumer powerhouse. The economy witnessed
structural and compositional changes in the consumption basket of rural and urban
sectors and income groups over the last three decades.
Kerala has become an enigma and a paradox to many economists and
development experts at national as well as international level (Paul Wallich,
1995). It presents a paradoxical picture of high social development with uneven
economic growth. As regards social development the state has successfully
tackled the first generation problems like illiteracy, high infant mortality rate, low
expectations of life at birth, high birth rate and related indicators of under
development when other states are still grappling with them(Baiju2004). From an
international development perspective, Keralas achievements, despite the states
low per capita income are comparable to or even better than that of countries like
Sri Lanka, China, Costa Rica & Cuba (Sen, et. al, 1995).
Consumption pattern of the people in Kerala across the state exhibits
some interesting features. Amidst several socio-economic, demographic and
geographic characteristics that make the state distinct, consumption is a factor
which stands out. There is a significant increase in the level of consumption of
both food and non food commodities. Keralites seem to be spending a lot of
money on consumer durables
spending and conspicuous consumption has become the order of the day. Kerala
has been experiencing an unprecedented consumption boom and increasing
standard of living (Ibrahim, 2002). With only 3.4% of the countrys population, it
accounts for 10 % of the total consumption (Madhava Menon, 2000). The value
of consumer articles flowing into the state is estimated to be in the range of 50-60
billion Indian rupees.
For the past two decades, Keralas market has been witnessing the
domination of Multi National Corporations (MNCs) with their branded products
and services. As the world trade is opening up more and more, there are numerous
big groups targeting the Kerala market. For the past few years, MNCs have
invested financial and managerial resources in India to develop the market for
their product, especially in Kerala ( Sreenivasan ,1999). Kerala today ranks at the
top among Indian states in per capita consumption expenditure though its rank in
terms of per capita Net State Domestic Product (NSDP) is relatively lower.
Emigration has become the striking feature of the Kerala economy. The
economic consequences of migration and migrant remittances are found in the
increase in the household income and changes in the income distribution. Money,
mainly from NRI remittances, is steadily flowing into Kerala. Real estate prices
are soaring as NRIs and their families are buying land as an investment or
building ostentatious houses as that is now seen as a glittering status symbol. The
majority of migrants belonged to poor families from rural areas. A sudden spurt in
their income has given rise to a rising per capita household expenditure in the
state (Harilal and Joseph, 2000).Conspicuous consumption has become the
hallmark of an emigrant, especially a Kerala emigrant.
The impact of migrant remittances on the phenomenal increase in income
from salary/ wages has been profound. Foreign remittances to the state gave a
spurt to the consumerist ways of behaviour. Suddenly consumerism found favour
with people especially among the middle and low income groups. The impact is
visible even in villages. Shops have started stocking modern goods hitherto
unknown and unfamiliar to Kerala consumers. Markets and shops got a face-lift.
The changes are overwhelming. In todays consumerism, consumers can hardly
escape from the pressure exerted by innumerable products and services; the
attraction of modern goods is hard to resist. As different from other states in the
country, the people in Kerala recognise consumption as a yardstick to measure
socio economic status and prestige. Consumption of commodities and services
that smack of the luxurious and ostentatious, as opposed to the practical and
essential, has therefore, found acceptance in society. People want to possess
things that are beyond their means. The insensible passion for possession of
consumer goods as a means of improving / maintaining social status has left them
staggering under heavy financial commitment. Unable to pay back the loans taken
from individual and financial institutions many are driven to suicide. According to
the Government of Kerala, 22 families resorted to suicide due to financial reasons
(as
presented
to
the
state legislative
assembly in
November
2004)
(Sooryamoorthy , 2007).
During the last few decades dramatic changes have taken place in habits,
items and quantum of food consumption. There has also been a change in our
lifestyle. Our modern society is all geared up to make life easier for us. Labour
saving devices like the mixer, washing machines, vacuum cleaners, refrigerators,
lifts & elevators, automobiles etc. have contributed to decreased activity levels
across all age groups. Increased food intake coupled with a sedentary lifestyle has
resulted in an increasing incidence of overweight and obesity ( Gopalakrishnan,
2005).
In this context, the present study is an attempt to go through the changing
consumption pattern in Kerala. An enquiry has been made to find whether there is
any change in the consumption of food and nonfood items among different socio
economic groups .Changes in category, quantity, mode of purchase, place and
frequency of purchase are also analyzed. The changes that have taken place
during the last 10 years are highlighted. The study also analyses the nature of rural
urban divide with regard to the consumption pattern of households and also by
economic categories.
1.4
Census Reports, Reports of NSSO and Central and state Statistical Organizations,
different websites etc. The prices of the commodities were collected from
Economics and Statistics Department.
1.6.1 Sample design
A multistage sampling procedure has been adopted for selecting sample
households. In the first stage, two Districts from central Kerala Kottayam and
Alappuzha are selected. Factors such as industrialisation, urbanisation, Gulf
migration, mushrooming of shops, increasing sales of vehicles, consumer durables
etc. which influence consumerism is manifested in abundance in Kottayam.
The district of Alappuzha is contiguous to the District of Kottayam.
However, its economy, standard of living and consumption pattern vary
significantly from that of the latter. It is the smallest district in Kerala having the
highest density of population. Kuttanad, the rice bowl of Kerala lies in the district.
It has vast coast line with a large chunk of the population belonging to the
fisherman community. The source of income and its potential vary to a great
extent from that of Kottayam district. Since the majority of the population
depends upon fishing and agriculture for their livelihood, the vagaries of monsoon
have significant impact in determining the income and purchasing power of the
population.
10
Kottayam
(300)
Alappuzha
(300)
Changanacherry
Municipality
Paippad Grama
Panchayath
Alappuzha
Municipality
No of
Households
(60)
No of
Households
(240)
No of
Households
(84)
Kainakari Grama
Panchayath
No of
Households
(216)
11
12
accommodated fully in the book. However most of the tables have been included
in the appendix for reference.
1.10 Scheme of Study
The first chapter introduces the research problem, its objectives,
hypotheses, methodology, sample design, tools of analysis, limitations, scheme of
study and theories on consumption. The second chapter contains the review of
various related studies. The third chapter deals with the consumption pattern
scenario in India and Kerala. The fourth chapter is devoted to analysing the socio
economic and demographic profile of the sample households. The fifth chapter
deals with changing trends in consumption pattern of households in Keralaregion- wise, economic category- wise, item- wise and reasons -wise. Association
between variables affecting consumption are also analysed. The last chapter deals
with the findings and conclusions of the study.
1.11 History of the Analysis of Consumption
In the history of demand analysis two related but separable approaches can
be identified. One set of approach is available from the works of Economists
interested in the discovery of general laws governing the operation of markets
particularly agricultural markets and the second set originates from the initial
efforts of statisticians, interested in the psychological laws governing what has
come to be called consumer preference. Brown and Deaton (1972) hold the view
that this dichotomy still continues to characterize the subject. Recently theoretical
economists and mathematicians have developed more sophisticated techniques
which help us in understanding the complex nature of pure mathematics of
preference relations. This interplay between the theory and reality has been
perhaps more fruitful in demand analysis than in any other branch of economics.
In 18
th
and 19
th
the measurement of demand curves despite its early and promising beginning .It
was Ernest Engel in 1857 who made an outstanding contribution to demand
theory that turned out to be the most enduring empirical laws governing the
13
relationship between income and expenditure pattern of the people. In the late
19th century the fusion between the theoretical and empirical approaches in the
writings of Alfred Marshall (1896) acted as a catalyst which inspired agricultural
economists to apply the newly discovered technique of correlations in the analysis
of single markets. Marshalls great contribution was the clarification and
elaboration of the concept of elasticity of demand which offered a precise
framework for numerical measurement of market characteristics.
In the econometric study of demand a substantial progress was achieved by
agricultural economists in the United States beginning with Moore(1929) who
published a number of important studies between 1914 and 1929. By 1939, most
of the strengths and weaknesses of classical demand analysis had been probed
into and most of the techniques still in use had been discovered .This classical
approach can be characterised as the application of variations in least squares
single equation fitting, to both time series and cross section data, of market
models based on the theoretical contributions of Slutsky (1915), Allen and Hicks
(1934) and Hicks (1936)studies by Schultz (1938), Wold and Jureen(1952) and
Stone (1953) can be regarded as a consolidation of the theoretical and empirical
attempts at static demand models in the first half of this century . Since then there
have been a number of important developments in demand analysis. Samuelsons
(1948) introduction of revealed preference theory was a new approach to the
theory of consumer demand. The revealed preference hypothesis is considered as
a major breakthrough in the theory of demand because it has made possible the
establishment of law of demand directly.
1.12 Consumption: Theoretical Developments
Consumption is defined as the total value of expenditures on goods and
services for the current use by the household sector (Henderson and Poole, 1991).
Consumption patterns provide the structure for everyday material life, and this
structure creates economic distance across classes. Consumer goods are divided
according to the consumers needs they satisfy or their utility. A commonly used
classification identifies 10 classes of expenditure: Food, clothing and footwear,
housing,
heating
and
energy,
health,
transport,
household
appliances,
14
15
16
level when the basic necessities have been met. Today the term Engel curve is
used to denote families of curves which show the functional relationship between
consumption of a good against income, other things being equal.
1.13.2 Macro economic theories
The post war efforts to re- specify the consumption theory are found in
macroeconomic formulations of Consumption Function. Since Classical
Economist lived in the world of full employment the volume of consumption
expenditure was not of prime importance in their analysis. Consumer maximises
his utility within the budget constraint and emphasis is on the price variables in
the resultant demand function. However, some classical works do talk of
consumption function. Pigou (1952) and Marshall admit the existence of a
relation between aggregate income and saving but the significance arise only in
the course of long run growth and not in the short run variables.
Absolute income hypothesis of Keynes
It was (Keynes) who formulated the consumption function in a specific
and systematic form. This served as a corner stone of Keynesian theoretical
structure (Gupta, 1986) . Keynes fundamental psychological law was the first
serious formulation of the consumption function. The law states that as income
increases consumption also increases but not by as much.
Keynes theory of consumption function summarises the following
propositions.
a.
b.
c.
A higher absolute level of income will tend as a rule to widen the gap
between income and consumption because the satisfaction of the
17
Consume and it does not differentiate the long run and short run Marginal
Propensity to Consume . The wealth effects are not included. C/y is the ratio of
consumption to income or average propensity to consume which declined with
increase in income
Standard Keynesian Doctrine was first challenged shortly after the II world
war (Timbrell, M C (1976).
A number of variants of the simple Absolute income Hypothesis were
estimated using various sources of data and the results were far from encouraging
and the forecast very poor.
(Davis, 1952) analysed the predictive ability of a number of CF fitted to US
data ( 1929- 40)
Brady and Friedman (1957) on the household budget data demonstrated
that although consumption function has a positive intercept and hence the MPC
was less than the Average Propensity to Consume (APC) the intercept shifted
upwards over time.
Smithies (1945) used a time trend to capture a ratchet- like effect in his
analysis of annual series data but the most important results were produced by
Kuznets. Kuznets (1942) demonstrated that over fairly long periods the APC was
high and stable while the MPC was lower than the average, lower in the short than
18
the long run and tended to fluctuate in value particularly during the war period.
Absolute income hypothesis was incapable of explaining the apparent
contradictions. The credibility of Keynesian theory was weakened because it
failed to predict the post war demand in India. These empirical evidences lead to
the search for new theories of consumption behaviour resulting in three major
hypotheses.
Relative Income Hypothesis
Deusenbery (1949) formulated his theory Relative Income hypothesis as
a reconciliation effort on the basis of habit persistence hypothesis, stating that the
consumption behaviour was interdependent and consumption relations were
irreversible overtime. He argued that consumption of an individual not only
depends on his absolute income but also on the past level of consumption. It was
difficult to reduce previously attained higher level of consumption than to reduce
the saving. This reflected the cyclical behaviour of C/y. The theory explained
both time series and cross-section formulations of consumption behaviour
The Relative Income hypothesis was formulated as
C/y = a+b (y/yo),b<o
Where yo was Peak previous income. Therefore the predicted values of c/y
from this function were higher in recessions. In the long run
Yo= Yt-1
Y/Yo (1+y)
( = some constant)
Where y was the growth rate of income per unit of time Thus c/y= a
constant term in the long run.
The habit persistent Hypothesis
Developed by Brown (1952) assumes a continuous influence of past
consumption habits and previous consumption is taken as the relevant lagged
variable. According to him habits, customs, standards and levels associated with
real consumption previously enjoyed become impressed on the human
physiological and psychological systems and this produce an inertia in consumer
19
behaviour. Also, the shorter the time lags the stronger is the effect of habit
persistence.
The Permanent Income Hypothesis
Friedman( 1957) formulated the theory of Permanent Income Hypothesis.
Peoples consumption depends not only on the income they actually receive in
the current period but also on the income they expect to receive on a continuing
basis.
Let Y represent a consumer units measured income for some time period,
say a year. This income is the sum of two components. Permanent component
(Yp) and transitory component (Yt) or Yp+Yt.
The permanent component was interpreted as reflecting the effect of those
factors that the unit regards as determining its capital value or wealth, the
nonhuman wealth it owns, the personal attributes of the earners in the unit, such
as their training, ability, personality, the attributes of the economic activity of the
earners such as the occupation followed the location of economic activity and so
on. It was analogous to the expected value of probability distribution.
The transitory components was to be interpreted as reflecting all other
factors that were likely to be treated by the unit affected as accidental or chance
occurrences though they may from any other point of view, be the predictable
effect of specific forces, for example cyclical fluctuations in economic activity. In
statistical data the transitory component included also chance errors of
measurement. Similarly let C represent a consumer unit, it was regarded as the
sum of a permanent component (CP) and a transitory component ( Ct), so that,
C= Cp+Ct. Friedman took the expenditure on durables as investment and services
as derived from stocks of durables in CP. So CP = KYP.
The function had no intercept. Accordingly Brown (1952) introduced a new
approach to consumer behaviour. He cited that customs and habits influence
consumer behaviour. It implies that change in consumption expenditure was
comparatively slow to the changes in their income. He took the lagged variable as
previous consumption instead previous income.
20
Ct = a + b Yt + d Ct- 1
But Friedman found lags in consumer behaviour. He made a clear
distinction between income actually received (measured) and income for actual
consumption (permanent income)
Permanent income hypothesis was tested empirically for time series and
cross section evidence by Klein(1958), Drake (1964), Modigliani and Ando
(1960), Bodkin (1959), Mayer (1966).
The Life Cycle Hypothesis
Life cycle hypothesis was developed independently from the permanent
income hypothesis. This was the contribution of Modigliani, Brumberg, Ando and
Modigliani (1963). The typical consumer had to choose a consumption stream to
maximize a utility function defined on present and future consumption, which was
subject to a life time resource constraint and which was itself stable over time.
The underlying argument of consumption function was that consumption
depends on the resource available to the consumer over his entire life span, the
rate of return on capital and the age of the consumer.
Available resources mean existing net wealth plus the present value of all
current and future non property earnings (labour earnings). Accordingly a
consumer allocates his income, accounting all his present resources, to maximize
utility over his life time. Thus an increase in income will add to consumption, to
the extent it adds to total life time resources. Obviously, the consumption depends
on these resources (labour and property) instead of current income.
The life cycle Hypothesis can be illustrated as
21
22
Marginal Propensity to Consume (the slope of the CF) is much greater at low
levels of cash on-hand than at high levels. In other words, the converged
Consumption Function is strongly concave. Thus
the first
comes out of the analysis is that, as Keynes (1935) argued long ago, rich people
spent a smaller proportion of any transitory shock to the income than poor people.
References
23
24
25