Background: A randomized study was carried out on individuals who were comfortable talking about their income and their spending habits. The study also involved a random sample of all the citizens in order to ensure that the study was as representative as possible.
Methods: The period of study was from October 2013 to March 2014 and the follow-up period for the study was after six months. The study involved the use of questionnaires on the employees who were selected. The questionnaires were also mailed to employees who could not be reached physically. The questions contained in the questionnaires included: Employees’ levels of income, age, sex, marital status, their anticipated action in case of an increase in income, and their levels of education. The study involved a specific public corporation that is at the centre of public interest, and for that matter represents the interests and the spending habits of most employees. The study also involved the analysis of the company’s annual financial reports in order to get reliable information concerning the employees’ levels of income and levels of education, which is a great determinant of income levels (Kanji, 2006).
Results: A total of ten employees were recruited into the study, and nine out of the ten employees indicated that if their income was an increase, they would also increase their expenditure but at a less proportionate rate. There was no response from one employee and the other one employee indicted that increased income would have no effect on his spending habit. Demographic factors such as sex, age, and marital status had great influence on how individuals spent their income but what was clear was that increased income increases people’s levels of expenditure. The spending habits of high-income earners were also compared to those of the low-income earners and the results showed that the high-income earners had a tendency of going for the expensive commodities, which were not in the taste for the low-income earners, for obvious reasons (Kanji, 2006).
Conclusion: Income level has great influence on how people spend and the kind of lifestyle they choose. Individuals generally live according to the level of income that they earn (Laband, & McClintock, 2001). The higher the income, the higher the amount of money dedicated for consumption expenditure. It is noted that income differs across populations and as much as individuals would increase their expenditure with the increase in the incomes, it would only increase relatively to the income levels. That is, high income earners would comparatively dedicate high portions of income to expenditure as their income increases. As much as the low-income earners would increase their expenditure, it can not be equal to that of the high-income earners (Laband, & McClintock, 2001).
Income varies across the population depending on careers, academic achievements, profession, and nature of the enterprise that one runs. According to Ekelund and Tollison (1997), the variations in the income and economic powers are measured by the differences in the uneven wealth distribution and income inequalities, which is a major economic concern today. The differences in income and economic parity have led to differences in the living standards and expenditure pattern. Given that income is the primary measure of consumption and expenditure power, it is therefore essential to analyze how changes in income power influence the expenditure pattern. It is on this account that this study aims at investigating the relationship between income and expenditure/consumption pattern. This study is important in enhancing our understanding on the economic concept of income-expenditure and the variables that are associated with income and expenditure pattern. This analysis will help the researchers deeply understand the differences in expenditure and consumption given a change in disposal income (Ekelund, & Tollison, 1997).
This analysis will enable us establish the nature of the relationship that exists between these economic measures as well as predict the future pattern of expenditure for economic purposes. The basic tenet of income is that individual consumers normally determine the fraction of their current income that will be devoted to consumption on the basis of absolute level of income. Consumption and expenditure are functions of disposable income and as such, as aggregate real disposable income increases, the marginal propensity to consume declines. According to Ekelund, & Tollison (1997), people’s spending habit depend on what is called “fundamental psychological law”, which simply means that households would spend more on goods and services as real disposable income increases, but would not consume all of this increase in real disposable income. Several studies have been carried out in the past to determine the relationship existing between the levels of income and expenditure habits. The findings show that the environment, income levels, and social affiliations were significant determinant of expenditure habits of individuals.
Subjects and Methods
The primary objective of this study is to analysing the relationship between income and expenditure, to investigate the change in consumer expenditure given a change in their disposal income, and to determine the reasons for the differences in the expenditure pattern among different divides. To achieve these objectives, the study involved the use of a specific number of employees, which was nine, from a public corporation. The study involved the use of employees of all ages, genders, and of any marital status. The study involved employees who were comfortable about talking about income and who were able to co-operate with the researchers. They were given questionnaires and given time to respond after which the questionnaires could be collected back. Those who were not available were mailed and all the responses were compiled for proper analysis.
The study relied on both primary and secondary sources of data. The use of questionnaires was part of collecting primary data. The secondary data was collected from the secondary journals, books, internet, and articles. Economic Quarterly Journal was however the rich source of the data. The data (secondary data) was processed using the measures of central tendency and measure of dispersion. The data was represented using tables and graphs. This is because of the fact that the use of these data presentation methods as simple and provides a good visual impression that makes the comparison more easy (Ekelund, & Tollison, 1997).
A total of ten employees were recruited into the study, and nine out of the ten employees indicated that if their income was increase, they would also increase their expenditure but at a less proportionate rate. There was no response from one employee and the other one employee indicated that increased income would have no effect on his spending habit. Demographic factors such as sex, age, and marital status had great influence on how individuals spent their income but what was clear was that increased income is likely to increase people’s levels of expenditure. The spending habits of high income earners were also compared to those of the low income earners and the results showed that the high income earners had a tendency of going for the expensive commodities, which were not in the taste for the low income earners, for obvious reasons (Laband, & McClintock, 2001).
|Annual Income (‘000’)||Annual Expenditure (‘000’)|
In figure 1, it is observed that expenditure increases with increase in income. It, however, reaches a point whereby an increase in income only results into a fall in expenditure level. This fall is attributed to the concept of the marginal efficiency of consumption (MEC) (Laband, & McClintock, 2001). In figure 2, there is an upward rise in the graph but it starts to move downwards when it reaches a certain point due to marginal efficiency of consumption. It is noted that there is a positive relationship between consumption and expenditure, thereby implying that expenditure is a positive function of income. The two diagrams clearly show how expenditure reacts to changes in income levels, which was the main objective of the study. However, there are so many factors that can influence people’s decisions on their spending habits in relation to changes in their income. The first and most important factor is the psychological-social environment. This is where individuals try to emulate the spending habits of those around them and will thus strive to spend as those whose incomes are slightly above them in order to attain a feeling of belonging (Ekelund, & Tollison, 1997).
When individuals in their everyday living come into frequent contact with superior goods, the result is a “demonstration effect”, which causes the individual to want to spend more as their income increases since they desire the superior goods for status (Laband, & McClintock, (2001). However, an individual’s habit of the desire to belong to some social class and the “demonstration effect” must be considered in the context of the neighborhood in which one lives. For example, if an individual lived in a poor neighbourhood, say with an average income level of $500 and received $3,000 a year in income, he would consume less and save more since his income would be relatively high as compared to the average income of his neighbors. But if the individual received the same income ($3, 000) and lived in a rich neighborhood (with an average income of $ 8,000), he would consume more and save less since his income would be relatively low as compared to the average income of his neighbors. This concept implies that the amount of individual’s income that is devoted to consumption expenditure depends on the level of his income relative to the income of other individuals with whom the individual identifies with rather than on the absolute level of his income (Ekelund, & Tollison, 1997).
The other important factor affecting consumption expenditure is that individuals form their habit and expectation on the basis of their previous peak income (highest income level attained so far). They then base their consumption pattern on this income and never want to give up. In case of a recession in the economy, there is likely to be a fall in the household income but the individual will want to maintain the same living standards as when income was at its peak. This would mean that the individual would reduce the level of savings in order to retain his level of expenditure. According to Mattos (2006), as income falls, expenditure will always fall but less proportionally with the fall in income.
Ekelund, R. B., & Tollison, R. D. (1997). Politicized Economies: Monarchy, monopoly, and mercantilism. College Station: Texas Univ. Press.
Kanji, G. K. (2006). 100 statistical tests. London: SAGE Publications.
Laband, D. N., & McClintock, G. (2001). The transfer society: Economic expenditures on transfer activity. Washington, D.C: CATO.
Mattos, E. (2006). Three essays on fiscal policy and redistribution.
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