Estimating Food Demand Elasticities in Pakistan: An Application of Almost Ideal Demand System

Babar Aziz, Khalil Mudassar, Zahid Iqbal and Ijaz Hussain

Abstract

The main focus of the study is to estimate the rural-urban income and own price elasticities across a range of consumption quintiles. The Linear Approximate Almost Ideal Demand System (LAAIDS) is used to estimate the parameters of aggregate food commodity groups. Due to the specific features of the data, spatial variations in regional prices are estimated and used as proxies for food prices (i.e. unit values) by using household survey data. Regarding household specific elasticity estimates, households exhibit increasing consumption of vegetables, fruits, milk and meats with higher income. The expenditure elasticities are larger in rural areas compared to urban areas and expenditures on most food groups increase at a decreasing rate as income increases. Expenditure elasticities for all food groups were positive and less than one, except for fruits, meats, and milk that have been identified as luxuries. Cereals tend to have the lowest expenditure elasticity of demand. The uncompensated own-price elasticities of demand for all food groups are negative and their absolute amounts are lower than unity i.e. demand reacts in-elastically to own-price changes, except for meats (elastic). According to the values of the cross-price elasticities and on the level of all selected food groups, only substitution relationships are observed. The high price elasticities of demand for many food items stress the importance of food price changes for households, and their reactions should be taken into account in the development of comprehensive agricultural and food policies in Pakistan.