Why Angus Deaton got the Nobel Prize in Economics?

Nobel prize in economics

Angus Deaton won the Nobel prize in Economic sciences 2015 for his “analysis of consumption, poverty and welfare.” Through his work, he tried to improve the accuracy of measurements of economic indicators like income, consumption and poverty. His work has influenced policy-making in developing countries.

As per the Nobel committee, his work helped transform  the fields of modern Microeconomics, Macroeconomics and Development economics. (The three major branches of economics.)

The Nobel committee has highlighted three major achievements by Deaton to grant him the Nobel prize:

Estimation of  a demand system known as ‘Almost Ideal demand system’

A Demand curve is a curve which represents the relationship between the quantity demanded of goods and the price. The estimation of demand is very useful in policy-making. To illustrate: if the Government wants to increase indirect taxes in the economy, it should know the effect of the increment (and the subsequent increase in price) on the quantity demanded of goods (consumption pattern).

However, the existing demand curve made rigid assumptions and did not reflect consumer choices accurately. This led to the formation of the ‘Almost Ideal Demand System’ by Deaton in the year 1980. This system was not only simple but also made lesser assumptions about consumption pattern.

The study of the link between consumption expenditure and income.

The study of income and consumption is important in macroeconomics. It is important because the difference in Income and consumption is savings and these savings are useful in capital formation and investment in the economy.

Macroeconomists mostly used aggregate data to study income and consumption. It has been found out that when aggregate income in an economy increases, aggregate consumption also increases, but by less than the increase in income. Deaton insisted that for a better understanding, the effect of income on consumption should be studied at an individual level and then aggregated at a national level.

He found out that at an individual level when income increases, consumption actually increase more than proportionately than the income. This is because current changes in income often indicate future changes in income. But, at an aggregate level, this effect is averaged out as income goes up for some people in the economy and down for other people.

Measurement of living standards and poverty in developing countries using household surveys:

The aggregate economic indicator like GDP, savings etc. do not accurately reflect the quality of life of the people. They are often misleading.  Hence, it has to be linked to the evidence from individual household surveys. This would lead to a more reliable measurement of living standards as well as poverty.

So, by now we know a little about Angus Deaton. Last, but not the least, the Nobel prize in Economic sciences is the newest Nobel established. It was set up by the Sweden’s Central Bank only in the year 1968 as a memorial to Alfred Nobel.



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