Asian Economic and Financial Review

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1 Asia Ecoomic ad Fiacial Review oural homepage: ESTIMATION OF URBAN-RURAL EXPENDITURE AND HOUSEHOLD SIZE ELASTICITIES OF FOOD ITEMS IN PAKISTAN:- EVIDENCE FROM PSLM SURVEY Abdur Rehma Ph.d Cadidate, Ecoomics & Trade College, Agricultural Uiversity of Hebei Wag Jia Professor, Ecoomics & Trade College, Agricultural Uiversity of Hebei Zhag Ruqig Professor, Ecoomics & Trade College, Agricultural Uiversity of Hebei ABSTRACT This study evaluates the household food demad patters amog differet icome sorts i urba ad rural areas of Pakista ad estimatio of food expediture ad household size elasticities. The differet icome sorts are the Lower Icome Group( 8000), Lower-middle Icome Group( ), Middle Icome Group( ),Upper-middle Icome Group ( ) ad Upper Icome Group (35000+) Pakistai rupees respectively. For the aalysis purpose the cross sectioal data were take from Pakista Social ad Livig Stadard Measuremet Survey (PSLM) by Federal Bureau of Statistics (FBS), Govermet of Pakista, Islamabad. Egel Expediture elasticities are a powerful research tool i the household aalysis. If expediture o a certai item is proportioal to icome or total expediture the the icome elasticity of demad is better kow as Egel elasticity is uity. The food expeditures are the sum of expeditures by each household o the followig commodity groups: cereals, pulses, fruits, vegetables, dairy products, chicke, meat, fish, codimets, sugar, edible oils, driks ad miscellaeous food products. The household size ad icome elasticities are estimated to explai the food cosumptio treds i Pakista. The results of the study idicate that all the icome ad household size elasticities are positive ad sigificat at oe percet level of sigificace. Results of the study also idicate that the urba food cosumptio is higher i the upper icome group (IG) while households belogig to other classes of rural areas are more food resposive. Urba households depict higher size elasticities i overall, lower IG, lower middle IG ad middle IG whereas households belogig to upper-middle IG ad upper IG of rural area are also more food resposive. 183

2 Key Words:Urba-Rural Households, Icome Groups, PSLM Data, Icome Elasticities ad Household size Elasticities. 1. INTRODUCTION Pakista is a developig coutry ad falls i the low Huma Developmet Idex (HDI) because Pakista is raked 145th out of 187 coutries (Uited Natios Developmet Programme, 2011). It is world s sixth most populous coutry (Official Pakistai Populatio Clock, 2010) ad about 22.6 percet of the total populatio lives below the iteratioal poverty lie of US $1.25 a day (Idicators, 2011). Household cosumptio patter is rapidly chagig i Pakista like other developig coutries due to the well modified ad moderized system of the availability of goods ad services. Despite the ease of lifestyles the coditios of most of the people are still miserable ad they are i worry to fulfill eve their basic cosumptio eeds. The stadard of livig i Pakista is highly differetiated ad varies amog differet social classes. Though over more tha 35 millio families are regarded as growig middle class but a large portio of the coutry's populatio is still poor. Household demad is a combiatio of two importat words household ad demad. Household refers to a sigle perso or a group of persos who ormally live ad eat together ad share kitche, While the demad is the quatities of goods ad services that the cosumers are willig ad able to buy from the market at various prices. Cosumptio of various goods ad services is the reflectio of household expediture patter which are largely iflueced by household compositio, eeds, taste ad fiacial meas. Ecoomists use the cocept of utility to defie the level of satisfactio or welfare that comes from a specific allocatio of icome amog differet products. Egel (Expediture) elasticities are a powerful research tool i the household aalysis. I ecoomics the variatio from proportioality of oe variable with respect to aother variable is measured by elasticity. Thus, if expediture o a certai item is proportioal to icome or total expediture the the icome elasticity of demad, better kow as Egel elasticity is uity. O the other had, if expediture o a certai item rises more proportioately relative to icome, the Egel elasticity is greater tha oe. Similarly, if expediture o a item rises less tha proportioately relative to icome, the Egel elasticity will be less tha oe. This cocept is helpful i categorizig the commodities ito differet groups. The commodity is cosidered to be a ecessity, ormal ad luxury if it has Egel elasticity less tha oe; equal to oe ad greater tha uity, respectively. The elasticities of differet commodities with respect to total expeditures are calculated ad results are compared across the commodity ad icome groups (IG). These results provide the guidelies for future policy implicatio i respect of the maagemet of the demad ad cosumptio of food commodities i the coutry. The progress ad developmet of ay ecoomy is related with the cosumptio i a way that it measures the welfare of the people who are makig expediture o the purchase of various cosumptio heads. The agai, it is helpful i the extesio of busiess activities because the etire ivestmet set up is depedet upo the cosumptio patter i the coutry. Due to the importace of cosumptio i the ecoomic theory, 184

3 a umber of researcher have carried out research o household deeds i Pakista ad i other coutries ragig from its simplest form to very complicated by usig differet types of data ad variety of ecoometrics techiques. Fuctioal descriptio of Egel s Law is kow as Egel curve which describes that how household expediture o a particular good or a service varies with chage i total icome or expediture. Budget share Egel curves depict how the share of household expeditures o a specific good or service chages with variatio i icome (Chai ad Moeta, 2010a). Egel curve of a commodity reflects its icome elasticity ad idicates whether a particular good is a iferior, ormal or a luxury good (Chai ad Moeta, 2010b). No established theory subsists that could explai the pragmatic shape of Egel curves ad their associated icome elasticity values. Erst Egel himself argues that households have a hierarchy of wats that determies the shape of Egel curves. As household icome rises, some icetives become more promiet as far as household expeditures are cocered that domiates cosumptio patters such as starvatio, ultimately become satisfied at higher icome levels (Witt, 2001). The specific obectives of the preset study are: (1) To determie the household cosumptio patter of various commodity groups of food items amog differet icome groups i urba ad rural areas of Pakista; (2) To measure the ecoomies of scale effect i household cosumptio by icludig the household size as a idepedet variable i Egel curve equatio. (3) To estimate expediture ad household size elasticities of demad system, ad fially to suggest some policies. 2. METHODOLOGY Data:-The data for this study is take from the Govermet of Pakista (2011)Pakista Social ad Livig Stadards Measuremet (PSLM) Survey , coducted by the Federal Bureau of Statistics (FBS), Govermet of Pakista9Islamabad. It is based upo two-stage stratified samplig desig. This survey, based o a atioal sample, covers the uiverse cosistig of all urba ad rural areas of the four provices of Pakista, amely Puab, Sid, Khyber Pakhtukhawa ad Baluchista apart from forces restricted military areas of these provices. This study uses a sample of 6580 households from urba area ad 9740 households from rural area out of total households covered by the PSLM due to ureported ad missig values for 21 households. The expeditures i the form of oly paid cosumptio are used for computatio because the goal of study is to compare cosumptio patters withi various icome sorts. The food cosumptio groups are as: cereals, pulses, fruits, vegetables, dairy products, chicke, meat, fish, codimets, sugar, edible oils, driks ad miscellaeous food products. Frequecy of food items data i PSLM is of two types i.e. fortightly ad mothly. The 14 days data is first coverted ito mothly iformatio ad the both of these groups are oied to make the household total food cosumptio durig the moth. Thus the depedet variable is the atural log of the mothly expeditures o food items (Govermet of Pakista, 2011). The total household expeditures are used as a proxy for icome as a idepedet variable because of the fact that icome data geerally suffers from measuremet errors ad may also iclude a trasitory compoet of icome (Burey ad Kha, 1991). The use of total expeditures istead of icome is a commo practice i 185

4 Egel curves estimatio because the expeditures mostly reflect the permaet icome of the households. Household total expeditures ad household size are calculated i the form of atural log ad the are used as a i depedat variable i this regressio aalysis. Household size idicates the umbers of persos livig i the sigle house. This variable is computed i the atural log form of total family size of the household. Havig certai advatages, the family size is used as a separate idepedet variable. The same is valuable to directly determie the ecoomies of scale effect, avoids the loss of iformatio problem ad gives more efficiet results regardig the household members (Malik ad Sarwar, 1993). I order to determie the food demad patter ad to make the cosumptio compariso; households are divided ito five icome sorts. Table 1 shows the household distributio with respect to differet icome sorts i both urba ad rural regio at the atioal level, measured i Pakistai Rupee. Icome groups iclude: The Lower Icome Group ( 8000), Lower-middle Icome Group( ), Middle Icome Group( ), Upper-middle Icome Group ( ) ad Upper Icome Group (35000+), respectively. Table- 1.Households Distributio amog Differet Icome Groups by regios Mothly Icome group Lowe Icome Group Lower Middle Icome Group Middle Icome Group Upper Middle Icome Group Upper Icome Group Overall Source: Calculatios usig PSLM data. Regios Number of households Percetage of Household Urba Rural Urba Rural Urba Rural Urba Rural Urba Rural Urba Rural A fuctioal form that is termed as the costat elasticity, log-log or double log specificatio which is udertake i this study has bee widely used for demad aalysis by Houthakker (1957), Burey ad Kha (1991). Though such a system is ot cosistet with the budget costrait ad the theoretical restrictios o systems of demad equatios but this is a frequetly used specificatio of a system of demad equatios ad at best ca be treated as a local approximatio to the true system of demad equatios (Griliches ad Itriligator, 1983). A doublelog specificatio has prove the most appropriate way of estimatig the expediture elasticity of demad ad it geerates more realistic expediture elasticities (Babar ad Shahawaz, 2010).Cosider a complete system of demad equatios for goods cosists of the demad equatios: 186

5 X X ( P 1, P,., 2 P, I, ) J = 1, 2, (1) Where X is the demad for good by a sigle household or a group of households, P is the price of good, I is icome which is the same as the expediture o the goods ad μ is the stochastic term i the th demad equatio. I order to estimate the system (5) it is ecessary to specify a particular fuctioal form for the estimatio of geeral relatioship. Thus the demad fuctios i (1) are specified as: X J 1 A P1 2 P 2. P I 1 e The liearizatio of (2) by takig logarithms leads to the log-log specificatio of the form. LX 1 1 LP 2 LP 2 LP (2) LI (3) Where = LA cosiderig the price effect costat, the are the icome elasticities of demad that ca be computed as: L X / L I X / I I / X Preset study uses a double logarithmic fuctioal form to estimate demad patter because of its certai advatages. It is simple as its estimatio ad iterpretatio is quite easy. It is most appropriate to estimate the demad patter of grouped commodities (Islam ad Siwar, 2005). The icome or expediture coefficiet is also the coefficiet of elasticity so there is o eed of further calculatio. It is a easy techique to determie the most efficiet effect of household size (Houthakker, 1957). Thus by icorporatig total expediture ad household size as a idepedet variables i Egel curve equatio ad takig the atural log gives: (4) le i i i i le ilhs (5) 3. RESULTS AND DISCUSSION Preset study uses double logarithmic regressio aalysis to compute the household food demad patter by computig its relatioship with household total expeditures ad household size. This systematic ivestigatio is deployed for both urba ad rural areas of Pakista separately by dividig the households ito five icome sorts. Ordiary Least Square (OLS) techique is employed. Estimatio of double log regressio (Equatio 5) gives estimates of food expediture ad household size elasticities. Results of the food expediture elasticities for urba ad rural areas are show i Table 2 & 3. All the food expediture ad household size elasticities for both the urba ad rural regios are sigificat at oe percet level. Most of the elasticity coefficiets exhibit quite little cyclical fluctuatios amog umerous icome sorts. 187

6 Table 2.Food Expediture Elasticities by Icome Groups for Urba Area of Pakista Mothly Icome Group Food Expediture Elasticities Lower IG Lower-Middle IG Middle IG Upper-Middle IG Upper IG Overall Source: Calculatios usig PSLM data. Table 3.Food Expediture Elasticities by Icome Groups for Rural Area of Pakista Mothly Icome Groups Food Expeditures Elasticities Lower IG Lower-Middle IG Middle IG Upper-Middle IG Upper IG Overall Source: Calculatios usig PSLM data. All the food expediture elasticities are less tha oe showig that all the icluded commodities are ecessities i ature. The urba ad rural food cosumptio is iitially icreasig with icrease i icome but it declies gradually as icome of the households teds to icrease. The urba food cosumptio is higher i the Upper IG. Households belogig to other icome sorts of rural area are relatively more food resposive. The validity of Egel s Law is verified for food cosumptio because its elasticity estimate is less tha uity ad its value decreases with icrease i icome of households. Table.4. Household Size Elasticities by Icome Groups for Urba Area of Pakista Mothly Icome Groups Household Size Elasticities Lower IG Lower-Middle IG Middle IG Upper-Middle IG Upper IG Overall Source: Calculatios usig PSLM data. The household size is used as a idepedat variable i order to ivestigate the ecoomies of scale effect. Results of the household size elasticities for urba ad rural areas are show i Table 4 & 5). Ecoomies of scale effect may occur because some food items ca be shared withi the household. Larger households may receive discouts as their quatity demaded is relatively high as compared to smaller households. Urba households depict higher size elasticities i overall, 188

7 lower IG, lower middle IG ad middle IG whereas households belogig to upper-middle IG ad upper IG i rural area are more resposive. Table 5.Household Size Elasticities by Icome Groups for Rural Area of Pakista Mothly Icome Groups Household Size Elasticities Lower IG Lower-Middle IG Middle IG Upper-Middle IG Upper IG Overall Source: Calculatios usig PSLM data. 4. CONCLUSIONS The study evaluates the double logarithmic aalysis to determie the household food demad patter i urba ad rural regios of Pakista. The data for this purpose is take from Govermet of Pakista (2011).The households are divided ito five icome groups. All the coefficiets of icome ad household size elasticities are positive ad sigificat at oe percet level of sigificace. The legitimacy of Egel s law is verified because the proportio of food cosumptio is lower as compared to icome. The household size aalysis cofirms the existece of ecoomies of scale for food cosumptio amog umerous icome sorts. The urba food cosumptio is higher i the Upper IG while households belogig to other classes of rural people are more food resposive. Urba households depict higher size elasticities i overall, lower IG, lower middle IG ad middle IG whereas rural households belogig to upper-middle IG ad upper IG are more resposive. REFERENCES Babar, A. ad M. Shahawaz, Household cosumptio patters i Pakista: A rural urba aalysis. Forma Joural of Ecoomic Studies, 6: Burey, N.A. ad A.H. Kha, Household cosumptio patters i Pakista: A urba rural compariso usig micro data. The Pakista Developmet Review, 30(2): Chai, A. ad A. Moeta, 2010a. The evolutio of egel curves ad its implicatios for structural chage. Griffith Busiess School, Discussio Papers of Ecoomics, No , ISSN Chai, A. ad A. Moeta, 2010b. Retrospectives egel curves. Joural of Ecoomic Perspectives, 24(1): Govermet of Pakista, Pakista social ad livig stadard measuremet survey (PSLM) Federal Bureau of Statistics, Islamabad. 189

8 Griliches, Z. ad M.D. Itriligator, Ecoomic ad ecoometric models. Hollad: North-Hollad Publishig Compay. Houthakker, H.S., A iteratioal compariso of household expediture patters, commemoratig the ceteary of egle s law. Ecoometrica, 25(4): Idicators, W.B., Poverty headcout ratio at $1.25 a day (PPP) (% of populatio). Retrieved Jauary Moday. Available from Islam, M. ad C. Siwar, Impact of the fiacial crisis o expediture patters i Malaysia: Special referece o low-icome households. Joural of Ecoomic Research, 10(2005): Malik, S.J. ad N. Sarwar, Some tests for differece i cosumptio patters: The impact of remittaces usig household icome ad expediture survey data of Pakista The Pakista Developmet Review, 32(4): Official Pakistai Populatio Clock, Miistry of ecoomic affairs ad statistics. Retrieved Jauary 17, Uited Natios Developmet Programme, Statistics of the huma developmet idex. Huma Developmet Reports. Witt, U., Learig to cosume. A theory of wats ad the growth of demad. Joural of Evolutioary Ecoomics, 11(1):