The Influence of Income Differentiation on the Structure of Household Expenditures

This essay examines the influence of income differentiation on private consumption. The author illustrates how to derive the total demand on individual goods from curves describing the income differentiation within the population (e.g., Lorenz) and the Engel curve. This model is later used to determine the differences in the expenditure structure of the employee households in the Czech Republic between the years 1988 and 1996 as a result of changes in income distribution (ceteris paribus). The author demonstrates that increases in income differentiation leads to increased expenditures on cars, houses, flats, and an overall growth of savings. On the other hand, it also leads to a decline in expenditures on nourishment, clothing, etc. The author also addresses the difficulties associated with the models? application (e.g., problems with deriving the Engel curve).