Effect of Varying Degrees of Transitory Income on Income Elasticity of Expenditures

Expenditure-income relations of selected groups of families are examined in two ways: (a) with the importance of transitory income increased and (b) with its importance decreased. The importance of the transitory income is increased by dividing groups of families into subgroups differing in permanent income, and then examining consumption in relation to current income of the subgroups. Such stratification tends to increase the importance of transitory income, since the more homogeneous the families are in permanent income the more the difference in income observed is transitory. The income elasticity of total expenditures is generally lower for the subgroups than for the entire groups—by 30 to 40 per cent. Similar tendencies also occur for expenditures for food, clothing and other consumer goods. The effect of the contrary tendency, i.e., reduced importance of transitory income, is tested by using mean income of consecutive years as a measure of economic status in place of current annual income. When this is done the coefficient of elasticity of expenditures in relation to income among families is increased over that observed for expenditures in relation to annual income. The increase is around 30 per cent. The findings support the hypothesis that much of the difference observed among groups in expenditure-income relations is the result of variation in the mixture of the income components.