An Empirical Study into the Relation of Income and Consumption Using Cross-Sectional Data

The main objective of this research is to measure the relationship between income and consumption.For this purpose both the primary and secondary data sets were used.Secondary data for the year 1980 to 2012 was obtained from the Ministry of Finance Government of Pakistan.Primary data was collected from two public sector universities of Peshawar.Out of the total 697 respondents 150 were randomly interviewed using lottery method.The overall results of the secondary data are in line with the Keynesian Psychological law of consumption, that consumption is the positive function of income.The coefficients of income is 0.86 which is statistically significant at 1 percent level showing, as national income of Pakistan increases by Rs. 1 million, the consumption increases by Rs.0.86 million.The potential of consumption was higher in higher income households.Findings are in line with the Keynes economic theory [1], which suggests that the income variable has positive effect on household consumption.There are positive relationships between income, education and family size, they are statistically significant.The study recommends that in order to enhance the purchasing power of the people, increase in salaries, wages, reduction in personal taxes and subsidy on basic necessities be provided. I. SPECIFICATION OF PROBLEMConsumption accounts for two thirds of GDP in most countries and is the most important determinant of welfare.In addition, consumer attitudes to saving which is based on consumption decision are very important for capital accumulation, the process of investment, growth and development.These facts make consumption and saving among most popular Research areas both in macroeconomics and microeconomics [2].Consumption is the most important single element in aggregate demand, so that its accurate estimation is essential to the management of the economy.Keynes related consumption to current disposable income [1], and for many years this was widely accepted.In 1950s evidence was recorded for discrepancy between the consumption function estimated from long-run time series data, and the much flatter consumption function estimated from short-run time series and cross-section data.The Keynesian consumption function therefore could not resolve this discrepancy, and it was together with the need for more accurate forecasts of consumption, that led to the development of the permanent income, life cycle and relative income hypotheses.The central position of the consumption function in Keynesian economics has therefore led to many attempts to estimate and question that would indeed predict consumer expenditure.Unfortunately, most of the early Keynesian types of equations failed to explain some of the more interesting feature of aggregate consumer behavior.Alternative theories were therefore developed in the 1950s and 1960s which, it was claimed, fitted the facts rather batter than simple Keynesian view of consumption.Therefore the present study was conducted: A. Objective of the Study To test various income hypothesis includingAbsolute and Relative income hypothesis in the study area.2. To study the main determinants of consumption in the study area.3. To suggest policy recommendations on the basis of findings of the study. B. HypothesisHo': Increase in income does not lead to absolute increase in consumption.