Analysis of Pakistan's Household Expenditure data

Muhammad Arshad & Eatzaz Ahmad

Abstract

Generalizing quadratic expenditure system to spline specification in which the number and locations of knots are determined endogenously on the basis of Maximum Likelihood criterion, this study analyzes household expenditure patterns in rural and urban Pakistan for 12 food and 10 non-food commodity groups. Flexibility in the Engle equations systems resulting from the spline specification reveals that household consumption goods cannot be uniquely classified into necessities and luxuries, rather the classification changes substantially across income ranges. Thus a uniform structure of taxes and government expenditures will have varying implications for budget allocation and welfare of different income classes and, therefore, specific income transfer policies need to be supplemented with the uniform tax and expenditure packages.