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Family Budgets: Meaning, Importance and Engle’s Law of Family Expenditure

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Meaning:

The standard of living of a people is reflected in their family budgets.

A family budget is a statement which shows how family income is spent on various items of expenditure on necessaries, comforts, luxuries, and other cultural wants.

It shows the distribution of the family income over the various items of expenditure.

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The following is a typical family budget of a person with a monthly income of Rs. 900.

Item Expenditure Rs. Percentage
Food 540.00 60%
Fuel 54.00 6%
Clothing 90.00 10%
House Rent 72.00 8%
Lighting 18.00 2%
Children’s Education 36.00 4%
Medical Aid 9.00 1.0%
Travelling 9.00 1.0%
Religious and Social Ceremonies 18.00 2%
Entertainment and Luxuries 18.00 2%
Miscellaneous 36.00 4%
Total Rs. 900.00 100%

This is the family budget of our imaginary consumer family.

From a study of this budget, we may draw the following conclusions:

(a) That very small percentage of income is being spent on children’s education, religious and social functions, travelling, entertainment and luxuries,

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(b) Expenditure on light and medical aid is negligible,

(c) 10% of the income is spent on dress and 6% on fuel,

(d) But the biggest item of expenditure is food which absorbs 60% of the income.

According to Engels’ Law of Consumption, it is a typical poor man’s budget in which about 3/5ths of the income is swallowed up by food alone and practically nothing is left for medical aid, education and for the satisfaction of educational and recreational needs of the members of the family.

Importance of Family Budgets:

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Study of family budgets is of very great use from the economic point of view. That is why many economic organisations devote special attention to the study of family budgets. The economic and statistical organisation of a State Government in India makes a special study of family budgets of different classes of the people in the State.

To the householder, the study of this budget is very useful. He will be able to find out from the budget before him whether his income has been properly distributed among the various items of expenditure and also whether he has been able to balance his budget or not. If the house-holder is to derive maximum satisfaction from his limited income, then mapping out of expendi­ture beforehand is absolutely necessary.

To the economist, the legislator and the social reformer, the value of the study of family budgets is undoubtedly very great. They are able to form an idea of the standard of living of the people and the measure of economic welfare which is enjoyed by them. They are deeply interested in the economic welfare of the people, which very much depends on the way the income is spent.

A man may have a very large income, but, if it is not spent in a rational manner, he may not be able to derive maximum advantage from it. If the people waste most of their income on drinks and other harmful forms of consumption, then the economists and social reformers must sound a strong note of warning and call or urgent reforms. Another great utility of family budgets lies in this that they greatly help in determining the wages of labour and salaries of employees and in deciding about the dearness allowance claimed by them.

Thus, family budgets are a mirror of the consumption of a people. On consumption depends the standard of living, and the standard of living determines economic efficiency, which in its turn leads to economic prosperity. There is no doubt that the study of family budgets is very useful to the economist, to the householder, the social reformer and the State.

Engles’ Law of Family Expenditure:

Ernest Engels was a Prussian official. He studied a number of family budgets and arrived at certain conclusions. These conclusions have been given the name of Engels’ Law of Consumption.

They are:

1. As income increases, the percentage expenditure on necessaries of life decreases, and vice versa.

2. Percentage expenditure on luxuries and other cultural and recreational wants increases with an increase in income and decreases when income decreases.

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3. As for lodging or rent, fuel and light, percentage expenditure is generally the same for all incomes.

4. Whatever the income, percentage outlay on clothing is practically the same.

It should be carefully noted that it is percentage increase or decrease in expenditure which is mentioned and not the total amount of expenditure. A rich man, certainly spends a larger sum on food and other necessaries of life but the percentage expenditure’ on hood, etc., is certainly less. This law was enunciated in Europe but it has got a universal application. It applies to India also. Family budgets have been studied in almost all States of India. All these studies amply bear our Engels’ conclusions.

The percentages of expenditure may slightly vary, but these conclusions broadly hold good. A very large percentage of the small incomes go into the purchase of the bare necessaries of life, whereas people with large incomes spend a small percentage of their income on such things. In the case of luxuries, the case is quite the opposite.

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