Economics in real world- Angus Deaton

“2015 The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has been awarded to Angus Deaton for his analysis of consumption, poverty, and welfare.

Angus Deaton has explored many theories about poverty and its causes. He has studied how much more poor would it when they get more income, or how their health issues are related to their income. There are three areas of Deaton’s works that have been recongized by the commitee:

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  • First, his work on demand systems on how consumers distribute spending in order to forecast consumption patterns;
  • second, his work linking consumption and income on the individual and aggregate level;
  • and third, his more recent research on household surveys, which has led to a greater understanding about how poverty affects living standards.[/box]

NYTIMES:

“Suppose you wanted to understand the effect of a subsidy on rice on the well-being of farmers,” said Dani Rodrik, a Harvard professor of international political economy. “He has produced an approach that you can actually use with household data to trace through the effect of something like this on the well-being of different farmers.”

Though poverty and inequality is the main work that has been praised by the committee, his previous two works are also very significant for both macroeconomics and microeconomics. In his first work, along with a colleague, John Muellbauer he has proposed a new model calledAlmost ‘Ideal Demand (AID) System that could estimate the people’s reaction to a price changes which is used by governments tweaking taxes, supermarkets promoting products, and the like. Although there were some estimation models already, Muellbauer and Deaton’s model is beautifully simple.

In his second work, he helped to close the gap between macroeconomics and microeconomics. His work is on the relationship between consumption and income. This relationship is very significant due to the fact that savings(=income-consumption) determine how much an economy invests, thereby how much society’s future wealth will change. He suggests the `Deaton Paradox’ which explains the fact that sharp shocks to income didn’t seem to cause similarly large shocks to consumption, namely income should be smoother than consumption.

In order to inspire young economists, Angus Deaton offers three lessons:

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  • First, the theory should tally with the data—but if not, then do not despair. Puzzles and inconsistencies help to prompt innovation.
  • Second, the average is rarely good enough. It is only by understanding differences between people that we can understand the whole.
  • Finally, measurement matters. In other words, progress cannot be coherently discussed without definitions and supporting evidence.[/box]
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