Food Consumption in Pakistan: Applications of Linear Approximate Almost Ideal Demand System (LA/AIDS)

Abstract

This study aimed to estimate food demand system in Pakistan and determine the impact of important economic factors such as prices and income on households’ consumption decisions. A Linear Approximate Almost Ideal Demand System (LA/AIDS) of 14 food groups was estimated using secondary data from Household Integrated Economic Survey 2011-12. LA/AIDS estimates of the households’ monthly average food expenditure shares were compared and notable differences were found between urban and rural households, while differences across the provinces were not as profound exhibited. Compensated and uncompensated own/cross price and expenditures elasticities for the food groups were calculated from their estimated expenditure shares obtained from the LA/AIDS. For overall Pakistan, the expenditure elasticities of demand for all the food groups were positive indicating that they were normal goods. The magnitude of expenditure elasticities for milk, meat, fruits, rice, other cereals and baked products were greater than unity, and thus were categorized as luxury goods. Similar pattern of expenditure elasticities were noted in urban and rural regions. For rural household’s tea & coffee and beverages were also found luxury food. Across provinces, the magnitude of expenditure elasticities of demand for sugar, wheat & wheat flour and oil & fats were consistently less than unity, suggesting them as necessities. While milk, meat, fruits and other cereals were found luxury food groups in Punjab, Sindh and Khyber Pakhtunkhwa (KP). Baked products were preferred as luxury food in Sindh, KP and Baluchistan, while tea & coffee were preferred as luxury food groups in KP and Baluchistan. The estimated own price uncompensated demand elasticities for milk, sugar, vegetables, rice, other cereals, tea & coffee and baked product were greater than one when calculated for overall Pakistan. Comparison of estimated own price uncompensated demand elasticities across urban and rural regions revealed no significant variation. Food groups like milk, sugar, rice, tea & coffee and baked products were more than unit elastic to own price change in both regions. Comparison of estimated own price uncompensated demand elasticities across provinces revealed no significant difference for most of the food groups except, pulses, beverages and other cereals. The cross price uncompensated demand elasticities estimated for most of the food groups pairs were close to zero and were categorized as neutral food groups having no cross-price effect on demand. Only wheat & wheat flour and vegetables with oil & fats and wheat & wheat flour with vegetables were found the notable complements, while rice & fruits and rice & beverages were found substitutes. Based on these findings the study concluded that imposition of income tax or any increase in the general price level could hugely reduce consumption of milk, sugar, vegetables, rice, other cereals, tea & coffee and baked product and households would spend huge share of their income on basic necessities such as wheat & wheat flour, oil & fats, sugar, tea & coffee and vegetables. Government may formulate policies to stabilize food prices to enhance household minimum daily food requirements.