Consumption Patterns and Demand Elasticities of Selected Horticulture Products in Pakistan

Transcription

1 Polcy and Insttutonal Reforms to Improve Hortcultural Markets n Pakstan (ADP/2014/043) WORKING PAPER 04/18 Consumpton Patterns and Demand Elastctes of Selected Hortculture Products n Pakstan Abdul Jall Professor Pakstan Insttute of Development Economcs Islamabad abdul.jall@pde.org.pk Hayat Khan Assocate Professor College of Busness Alfasal Unversty Ryadh hakhan@alfasal.edu Abstract The demand elastctes for food tems at household level n Pakstan are estmated usng the Quadratc Almost Demand System (QUAIDS) and changes n the consumpton pattern n the food baskets over a perod of ffteen years are revewed, ncludng a detaled analyss of demand for mango, chl and tomato. The data came from three rounds of the Household Integrated Expendture Survey (HIES) from 2000 to We fnd that the share of household expendtures on mango and chl declnes whle t ncreases n the case of tomatoes. However, the sze of the elastctes vares from case to case whch has some nterestng polcy mplcatons. Keywords Pakstan, QUAIDS, Domestc Demand, Household Consumpton, Elastcty 2018 Abdul Jall and Hayat Khan All rghts reserved. Ths paper s ntended for the early dssemnaton of research outputs n order to elct comments and dscusson only. No part of ths paper may be reproduced n any form, or stored n a retreval system, wthout the pror wrtten permsson of the author.

2 I Introducton Household consumpton s a major component of natonal ncome, and n Pakstan consumpton expendtures account for around 80% of the GDP. Therefore, as Blundell (1988) ponts out, understandng the nature of household consumpton s mportant to understand the mpact of polces on an economy. It s partcularly mportant for understandng the changng nature and dynamcs of hortcultural markets. Pakstan s often descrbed as an agrcultural economy though the share of agrculture s no longer the major contrbutor to GDP. Pakstan s agrcultural sector has undergone sgnfcant changes over the last several decades. For example, patterns of land utlzaton, nput utlzaton, system of croppng, marketng system and the structure of the fnancal system closely connected wth agrculture have changed n mportant ways. Technologcal changes n agrculture, such as wdespread use of hgh yeldng crop varetes, whle they have contrbuted to hgher output, have rased envronmental problems such as lowerng the water table and sol productvty. Smlarly, rapd urbanzaton has shrunk the avalablty of land for agrcultural use, ncreasng ncentves for the use of avalable land for hgher valued agrcultural uses such as cultvaton of hortculture products and crop dversfcaton to enhance sol productvty. There are a many studes that nvestgate dfferent ssues related to the producton of vegetables, fruts and spces among other crops n Pakstan. Unfortunately, however, there are only a few studes that analyze the demand sde of the hortculture sector n a rgorous way. The present artcle s an attempt to fll ths gap. More specfcally, we focus on estmatng demand functons of selected hortcultural tems to derve estmates of demand elastctes to understand changes n demand patterns of hortcultural products durng the past ffteen years. As far as we know, our study s the frst to estmate household demand functons for hortculture products n Pakstan usng a rgorous system based approach, partcularly one that takes nto account the non-lnear mpact of ncome changes. In ths study we use a newly developed technque known as Quadratc Almost Ideal Demand System (QUAIDS) for our estmaton whch takes nto account the non-lnear mpact of the ncome changes. Gven the wde range of approaches avalable n formulatng a demand system, t s not surprsng that a large varety of functonal forms demand systems have been appled n the lterature. However, most of the functonal forms that are theoretcally consstent are also rgd n predctng consumer behavor. By rgdty we mean that the range of certan mportant parameters, such as own, cross prce and ncome elastctes, s restrcted by the 1

3 underlyng functonal form. Some examples of rgd demand systems are those based on Cobb- Douglas and CES utlty functons and the lnear expendture system. Rgdty s obvously an undesrable property that one would lke to avod n any meanngful emprcal analyss. On the other hand, most of the flexble demand systems are lkely to volate certan propertes and hence be theoretcally nconsstent. The demand systems based on translog ndrect utlty functon, quadratc expendture system, addlog demand system and almost deal demand system (AIDS), for example, fall nto ths category. An deal demand system would be the one that s theoretcally consstent and flexble at the same tme. Only AIDS comes close to ths crteron. It s flexble and satsfes the addng-up, homogenety, symmetry, and negatvty crtera. However, n practcal applcatons, AIDS can volate monotoncty and curvature. It s possble to test whether these propertes hold n the neghborhood of the actual data. If t passes the two tests, AIDS would provde a rch bass for demand analyss. However, even then AIDS has the lmtaton that t does not capture any non-lnear mpacts of ncome (Bank et al. 1996). It s possble that a consumer good can turn from a luxury nto a necessty after a specfc level of ncome. Despte all ts other attractve propertes, AIDS s unable to capture ths nonlnearty. Keepng these drawbacks n vew, Bank et al (1997) proposed QUAIDS for the calculaton of prce and ncome elastctes for the dfferent basket of goods and servces. Bank et al. (1997) extend the AIDS model to capture the nonlnear relatonshps between consumer goods and ncome of the consumers. There are a number of studes whch utlzes QUAIDS for gettng estmate of the prce and ncome elastctes (see for Example Banks et al. (1997), Blundell and Robn (1999), Moro and Skoke (2000), Fsher et al. (2001) and Abdula (2002)). However, QUAIDS has not been wdely utlzed n Pakstan. The present study contrbutes to the lterature n several ways. Frst, to the best our knowledge, ths s a poneerng study, whch concentrates only on the demand sde analyss of selected hortcultural products usng a non-lnear demand system. More specfcally, we study the changes n demand for mangos, tomatoes and chles over a perod of ffteen years by utlzng the three rounds of PSLM data n order to relate them to the overall changes n the consumpton patterns. Second, usng QUAIDS we estmate the elastctes of demand of mangoes, chles and tomatoes along wth other food tems for Pakstan as a whole and also at provnce level. The calculated elastctes are found to be consstent wth a pror expectatons accordng to mcroeconomc theory. It s expected that the fndngs of ths research wll help n fne tunng polces affectng the food prcng and other polces amng at poverty allevaton. 2

4 The rest of the paper s organzed as follows. Lterature revew s presented n secton II. secton III dscusses the methodology. Detals of the data are presented n secton IV. Emprcal fndngs are gven n secton V and secton VI concludes the paper. II Revew of Lterature As mentoned earler, a number of researchers have estmated demand functons for Pakstan, studyng demand for food and non-food tems both at ndvdual product level and n composte commodty groups. They dssect the country level analyss nto urban and rural level utlzng a varety of demand functons. Specfcally, the lterature on estmaton of demand functons and elastctes can be dvded nto three man categores n the case of Pakstan. Frst, sngle equaton models, second rgd system of equaton and thrd flexble system of equatons. More clearly, Al (1981), Sddque (1982), Malk et al (1987), Malk et al (1988) and Burney and Khan (1991) estmate the Engle equaton for the elastctes of varous food and nonfood commodtes. Almost all of them utlze the varous rounds of Household Integrated Survey (HIES). Then Al (1985), Ahmad and Ludlow (1987), Ahmad et al. (1988), Burney and Akhtar (1990) and Burney and Khan (1991) estmate the Lnear expendture system (LES) and Extended Lnear Expendture System (ELES) for the analyss of prce and ncome elastctes. It s nterestng to menton here that prce and ncome elastctes can be calculated through LES and ELES wthout usng the prce data. Ths estmaton s based on the assumpton that the margnal utlty of one good s ndependent of the consumpton of the other good. Deaton (1975) notes that ths assumpton s not plausble for food commodtes because these commodtes can never move ndependently. Then Deaton and Muellbauer (1980) specfy consumer demand model n whch the budget share of the th good s a functon of real total expendture and relatve prces. Ths overcomes the flaws of LES and ELES. Ths specfcaton s known as Almost Ideal Demand System (AIDS). AIDS s a more flexble model than LES and ELES (Deaton and Mullebauer 1980). AIDS postulates that budget shares reman constant n the absence of changes n relatve prces and real expendture. In Pakstan, Alderman (1988) s the poneer of usng the market prces data to estmate the consumer prce response n a system approach. Ths was followed by a number of studes utlzng AIDS and Lnear Approxmaton of AIDS (LA/AIDS) to estmate the consumpton patterns of rural and urban consumers of Pakstan both for the food and non-food commodtes. Surprsngly, tme seres data s never used except Burk (1997) for the analyss of ncome and prce elastctes n case of Pakstan. Burk (1997) analyses consumer preferences for eght food 3

5 commodtes by usng the tme seres over the perod of 1972 to The study apples generalzed axom of revealed preference (GARP) and LA/AIDS to test the exstence and changes n the pattern food consumpton. The study fnds that there s structural shft from gram to chckens n However, the sources of ths shft was not dscussed n the study. Furthermore, the study fnds the prce and ncome elastctes are n lne wth general economc theory of demand. Wth the excepton of the Burk (1997), almost all other studes based on AIDS and LA/AIDS are based on the cross sectonal data. For example, Alderman (1988) calculates ncome and prce elastctes usng AIDS. The data come from the 1979 HIES as well as a smlar urban survey conducted n 1982 usng a vrtually dentcal questonnare. A few surprsng relatonshps can be vsualzed n the rural results. The relatve magntudes of the estmated prce and ncome elastctes were wthn a plausble range. Al and Abedullah (1998) estmate demand elastctes for pulses by applyng the AIDS. Ther fndngs reveals that n general pulses have hgh ncome and prce elastctes. Ths result was contrary to a pror expectaton. More recently, Yousaf and Khall (2011) analyzes the demand for mlk n Karach-the bggest metropoltan cty of Pakstan- by usng AIDS for the year The study manly dscusses the determnants of the demand for mlk and fnds that household expendtures and age are major determnants of the demand of mlk n the case of Karach. Smlarly, Zahoor et al. (2011) use LA/AIDS to estmate the prce elastcty for eght food commodty groups for Punjab provnce. The study fnds that all food groups are prce nelastc. Yousaf and Khall (2012) explore changes n consumpton patterns n the case of Baluchstan by utlzng the LA/AIDS specfcatons. The study fnds that expendtures of the households on dfferent food tems are ncreasng at a decreasng rate. However, the reasons behnd the change n the patterns of the consumptons are not dscussed n the study. Azz et al. (2011) also estmate LA/AIDS and fnd ncome and prce elastctes for food tems n lne wth economc theory n the case of Pakstan. However, mutton and fsh are the exceptonal cases n ths analyss. More recently, Hayat et al. (2016) estmate LA/AIDS for the demand analyss of selected food commodtes n case of Pakstan. The nnovaton of the study s that t uses Pakstan Panel House hold Survey (PPHS) nstead of HIES 1. Ths study fnds, based on estmated values of elastctes, that vegetables, sugar, pulses, grans ghee and food grans are necesstes whle meat and mlk are the luxures. 1 PPHS s prepared by Pakstan nsttute of Development economcs. 4

6 As mentoned earler, Bank et al. (1997) note that AIDS and LA/AIDS, despte havng the property of flexblty, do not capture the non-lnear mpact of ncome. The dscusson of necesstes and luxures may be questoned on the ground of specfcaton of AIDS. Therefore, they proposed to utlze QUAIDS for ths purpose. Unfortunately, QUAIDS s not well dscussed n the case of Pakstan. We fnd only two studes n ths regards. Frst, Iqbal and Anwar (2014) use QUAIDS for the calculatons of ncome and prce elastctes usng HIES The nterestng outcome of the study n our context s that the elastctes of fruts are hghest n both urban and rural areas. Second, Hader and Zad (2017) calculate the consumpton patterns. QUAIDS s qute famous n estmatng the consumpton patterns across the world. For example, Abdula (2002) uses QUAIDS to analyze the food consumpton behavor of Swss famles and Kumar et al. (2011) uses t for the food tems n Inda. Urega et al. (2012) analyses welfare mpact of rsng food prces on rural households n Ethopa and Mttal (2010) estmated prce and expendture elastctes for dfferent food tems n Inda. Our detaled revew of lterature shows that there s scope for usng QUAIDS n Pakstan to estmate elastctes wth a flexble approach. The present study s the frst attempt to fll ths gap. III Theory and Methodology There are many models and demand systems that have been used to estmate demand patterns of households [for example (Gorman 1981), Howe et al. (1979), Deaton and Muellbauer (1980), Lewbel 1987, 1988, 1989, 1990, 1991), Dewert and Wales (1987, 1988), Blundell (1988), Banks et al. (1997), LaFrance et al. (2002), LaFrance (2004); and LaFrance et al. (2005, 2006) and LaFrance (2008)]. However, keepng the context of our study n vew, we shall focus here only on the AIDS famly. As mentoned earler that Bank et al. (1997) extend AIDS model for the analyss of non-lnear relatonshp and ncome. The new extended model s known as QUAIDS. Deaton and Muellbauer (1980) ntroduce an expendture functon to derve the budget share equatons by explotng the envelop theorems. Furthermore, usng dualty theory, the expendture functon can be converted nto ndrect utlty functon (IUF). The IUF n the case of QUAIDS s as follows: lna( p) ( p) 1 1 ln ln I u = + ( ) p 1 b 5

7 where I s total ncome of household and a ( p), b ( p) and ( p) al. (1997) further explan these vector n followng way: lna b 1 p, n n n j ln p 0 = 1 2 ln = 1 j= 1 ( p) = + ln p + n ( p) = = 1 ( p) = p ln p and j are vectors of prces. Bank et Then there are few theoretcal restrctons on the parameters to ensure that the demand functon wll be a well behaved functon: n = 1 n = 1, = 0, j = 0 and = 0 = 1 n = 1 n = 1 The symmetry condton of the Slutsky matrx requres = w ( p) The share equaton for QUAIDS model can be obtaned by applyng Roy s dentty: = + j ln p j j + ln I a + ln I a ( p) b( p) ( p) where p and p j represent vectors of prces of th and j th commodtes, and α 0, α j and γ j are the vectors of parameters. The restrctons on the parameters ensure that the demand functon s a well-behaved functon. However, the cost of these restrctons s that the drect parameters are no more nterpretable (Lewbel 1991). Therefore, we estmate prce and ncome elastctes for better understandng of consumpton patterns. To accomplsh the task, the share equaton 2 s dfferentated wth respect to prce and ncome to get the expressons, whch can be used for the calculaton of prce elastctes and ncome elastctes. w 2 I v = = + ln 3 ln I b v j ( p) a( p) w j 2 I = = j u j + jk ln pk ln 4 p j k b( p) a( p) 2 j j 2 then the expresson for ncome, uncompensated prce elastcty and compensated prce elastctes wll be, respectvely, as follows: 6

8 u e = +1 5 w e v j vj = + j 6 w Where j s the Keonecker delta. and e = e + e w 7 c j u j IV Data Preparaton The data s taken from varous ssues of Household Integrated Expendture Survey (HIES). As mentoned earler, we are gong to conduct a Pakstan level and provnce wse analyses. The number of households n the surveys vares across the regons. Table 1 shows the number of households whch are used n three dfferent rounds of surveys (see table). The data preparaton for estmaton of QUAIDS model s the most mportant part, whch comprses of several steps. Frst, we compute total monthly food expendture of each household. The data on monthly expendture s collected at varous frequences, for example, fortnghtly and monthly. The food expendture whch s asked fortnghtly, for example mlk, s multpled by 2.17 to make t monthly. By addng expendture on all food tems, we have total monthly food expendture of each household n one data fle. Then, we have to dentfy the food groups, for whch we want to compute the elastctes. For example, n our case we dvded the monthly food expendture nto 17 food groups - cereals, pulses, mango, chl and tomatoes etc (see Table A1 n appendx). In the thrd step, we compute food expendture for each food tem separately for each household. Then, we compute consumpton share of each food tem as we have total food expendture and separate expendture on each food tem 2. We compute consumpton shares by dvdng the food expendture on each food tem wth total food expendture. the shares must add up to 1. The second tem whch we need s the prce of each food tem to determne the elastcty. In computng the demand system, we use unt values as proxy for prces. The unt value for each food tem s smply the expendture dvded by quantty. Compute the monthly food expendture for each food tem, then the total quantty of each food tem. Now dvde the value (expendture) by quantty for gettng the unt value. 2 Note that before computng shares, we replaced the mssng values wth zero for each food tem. 7

9 Table 1: No. of Households n the three rounds of HIES Pakstan 16, Rural 5, Urban 10, KP 6, Sndh 2, Baluchstan 2, Punjab 3, Source: HIES V Emprcal Fndngs. Changes n the Consumpton Patterns/Some Stylzed Facts Table 2 shows the dynamcs of change n the consumpton patterns by dfferent regons of Pakstan. It s mportant to note that these changes are caused by a combnaton of factors whch shft the demand or supply curves or changes n prces. It s evdent from thectable that cereals, Mlk and Mlk products domnated n total food expendture throughout the last ffteen years, wth the excepton of Balochstan. Overall around 40 to 45% of the expendtures are allocated to Cereal, Mlk and Mlk products, whereas, n Balochstan, household spent around 1/3 rd of ther budget on these products. As opposed to other provnces, households n Balochstan spent more (around 15.9% n and 12.9% n of the total budget) Meat and Poultry. The general trend s that the proporton of ncome spend on Mlk and Mlk product ncreased over tme and household ended up spendng the hghest on Mlk and Mlk products n Ths s followed by Cereal whch was the hghest contrbutor n The share of Cereals has declned by 23.07% and that of Mlk has ncreased by 23.79%. Ths shows the dversfcaton of households towards hgh value products from staple food. It s nterestng to see that food expendtures on cereals n urban area dropped sgnfcantly whle t ncreased by 6.78 percent n rural areas of Pakstan. Expendtures on Mlk and Mlk products have however ncreased n rural as well as n urban areas. In , after Mlk and Mlk Products, Cereals have the hghest share at regonal level (20.80% for rural and 16.36% for urban households), followed by Tea (7.65%), Meat 8

10 (7.55%) and Sugar (6.53%) for rural households, and by Meat (9.94%), Tea (6.97%), and Sugar (5.33%) n case of urban household. At provncal level, the share of expendture spent on Cereals has declned n all four Provnces wth maxmum declne observed (33.15%) n Punjab. In contrast, the budgetary allocaton for Mlk & ts Products has ncreased n four Provnces, wth the maxmum ncrease n Punjab (57.45%). Overall, expendtures have moved away from Cereals towards Mlk and Mlk products, Other Fruts, Other Vegetables, Beverages and Readymade food, Other Spces (n rural areas only), Meat (Poultry) (n rural areas only) and Tomatoes. The share of food expendtures on fruts has ncreased n Pakstan - from 3.09 percent n to 4.11 percent n The ncrease s more pronounced n rural areas than n urban areas. It s also nterestng to note that the share of food expendture on fruts has ncreased n all provnces except n Balochstan. The case of mango s much more nterestng. The expendture shares on mango declned sgnfcantly n all cases. Our prce elastctes estmates shows that there s a marked ncrease n the prce elastctes of Mango makng t the most prce elastc commodty among those ncluded n our estmaton. Mango seems to have changed from a necessty nto a luxury good. The expendture share on Potato and Chles has declned n both rural and urban households. However, the share of expendture on Tomato has ncreased for both rural (by 10.8%) and urban (by 25.7%) households. The share of Pulses has declned by 7.85% and 4.15% for rural and urban households respectvely. The expendture share for Other Fruts has also ncreased for Punjab (more than doubled), and t has also sgnfcantly ncreased for KP (90%). The ncrease n expendture share of Fruts n Sndh (19.7%) s lower as compared wth Punjab and KP and hgher as compared to Baluchstan (7.88%). Ths may be due to the poor economc condton of the households n KP and Baluchstan. On the other hand, wthn a perod of 15 years the share of expendture spent on Pulses has declned for Provnces other than Punjab and Baluchstan. However, the expendture share of Meat has declned for Punjab (25.47%) and Baluchstan (18.73%) but ncreased for Sndh (15.88%) and KP (28.75%). Ths ndcate a clear change n the taste and preferences of households n the four provnces. Smlarly, the share of expendture on other vegetables has ncreased for four Provnces. The share of Potato has however declned n all the provnces. Lke potato, the expendture share of Sugar has also declned n the four Provnces, wth the maxmum declne n the case of Sndh (52.39%). Tea has a sgnfcant share n the budgetary allocaton of households n Pakstan. Its share has declned n all the Provnces, wth the maxmum declne n KP (33.70%). 9

11 An nterestng trend s observed n the consumpton of Beverages and Readymade food n Pakstan, where a remarkable ncrease can be seen n ts consumpton from to The ncrease s maxmum for Baluchstan (more than 4 tmes). The budgetary allocaton of households at overall, regonal, and provncal level reveals that the consumpton pattern has moved towards a more dversfed basket. The expendture share of Cereals has declned substantally wthn a perod of 15 years and consumpton has been dverted towards more nutrtve food tems lke Mlk, Fruts, and Vegetables. Ths ndcates a healthy sgn for people n Pakstan that they are movng ther consumpton basket from tradtonal Cereal-based food towards more nutrtous food. However, the rural households are not as better off as ther urban counterparts.. Elastctes As mentoned earler, we estmate QUAIDS for food group wth a specal attenton to hortcultural products for three dfferent rounds of HIES. We estmate equaton 2 usng Log lkelhood functon by mposng varous restrctons, lke addng up, Symmetry, homogenety and convexty on the parameters of the model. Bank et el (1997) postulate that QUAIDS s a well behaved model. Emprcally, the well behavor of the functon s ensured when the curvature condton satsfes. Therefore, the natural start of an analyss of any flexble demand functon s to test ts curvature condton. To accomplsh ths task, we fnd Egen values for 17 commodtes. All Egen values are negatve whch wll produce a sem-negatve ndefnte Slutsky matrx. The lterature on the estmaton of demand functon uses the phrase that the demand functon should be well behaved for workable purposes. The workablty mples that the demand functon may be used for polcy mplcatons. The lterature postulates that a wellbehaved demand functon must fulfll the propertes of monotoncty, convexty, symmetry and homogenety. Emprcally, we need non-postve Egen values to fulfll the curvature condton. It s also mportant to menton here that the curvature condton s automatcally met f the propertes of convexty and monotoncty are satsfed. Interestngly, the curvature condton s mposed n QUAIDS type flexble demand system (Chang and Serlets 2012). Accordng to ths statement the flexble demand system s nevtable for approprate emprcal fndngs. We fnd non-postve Egen values, whch ensures that the curvature condton s satsfed n our case 3. 3 However, we are not presentencng the results of curvature condton keepng brevty n vew. 10

12 The prmary objectve of the paper s to estmate the demand elastctes n the case of hortcultural products n the case of Pakstan. Therefore, the dscusson on the estmated parameter s beyond the scope of study. However, one thng whch s mportant to menton here s that sgnfcant estmates of lambda parameters ( ) mply that the QUAIDS s a vald model n the case of Pakstan household data. Accordng to the best of our knowledge, there s no study whch estmates the QUAIDS for the composte commodty group n the case of Pakstan. The ncome, compensated and uncompensated elastctes are shown n Table 3.. Income Elastctes: All food groups are characterzed as normal goods as all ncome elastctes are postve at natonal, regonal, and provncal level for the respectve three years (Except for Mango n case of Baluchstan for the year ). The demand for Cereals, Tea, Mlk and Mlk Products, Sugar, Beverages & Readymade food was elastc n These elastctes however declned over tme. Whereas the demand for Cereal and Sugar s stll ncome elastc, Mlk and Mlk products are untary elastc. The elastcty for Mlk & ts Products and Cereals declned from 1.08 to 1.01 and 1.20 to 1.14 from to respectvely. The ncome elastcty for Sugar & ts Products declned from 2.11 n to 1.48 n Tea and Beverages & Readymade food have however become relatvely less elastc wth respect to ncome. Ths mples that household spends relatvely less on these commodtes when ther ncome ncreases and vce versa. These trends are however not consstent across rural and urban areas and across provnces. Cereal for example has become relatvely more elastc n rural areas and relatvely less elastc n urban areas. Smlarly, t has become relatvely more elastc n Sndh and KP and less elastc n Balochstan and Punjab. It s nterestng to note that the demand for Cereals n ncome-elastc, at regonal and provncal level as Cereals s normally found to be ncome nelastc relatve to the demand for hgh value food (Mlk, Meat etc.).. It s already shown n Table-2 that the share of expendture on Cereals has declned substantally over the perod of 15 years (ths reducton s due to reduced demand for Cereals n urban areas). Ths trend of reducton n the consumpton of staple food s also observed elsewhere n the world. Some studes attrbuted ths declne to the dramatc ncrease n the world food prces between 2006 and Ths ncrease was partcularly stark for rce, corn, and wheat. Further large ncrease took place n 2010 and Whereas the ncome elastcty of Pulses, Edble ol, Baked tems, Tomato, Vegetable Ol and Chles s relatvely stable when we compare the values wth magntudes, the demand for Meat, Other Fruts, Potato, and Other Spces has ncreased but stll ncome nelastc and the ncome elastcty of demand for Magoes has decreased from 0.75 to 11

13 0.41. Agan these patterns are dfferent across the rural and urban areas and across provnces. For example, the declne n Mangoes ncome elastcty s observed n urban area only. Smlarly, the ncome elastcty of Mangoes has declned n Sndh, KP and Balochstan and ncreased n Punjab. Wth the excepton of Meat and other Spces, the ncome elastctes across rural and urban areas are not too far from each other. There are however wde dspartes n ncome elastctes at provncal level due to changes n the taste and preferences of consumers as ponted out above. v. Prce Elastctes: Compensated prce elastcty shows a change n quantty demanded because of a change n prces by capturng only the Substtuton Effect. Uncompensated elastcty, on the other hand, captures both the Substtuton Effect as well as the Income Effect. These own prce elastctes are found to be negatve for all food tems, overall, at regonal and at Provncal level. Wth the excepton of Mango and Chl, all other products have own prce elastctes less than 1 mplyng that these goods are necesstes n the household basket. Ths s true across provnces and rural urban dvde. Wthn a perod of 15 years the responsveness of households to curtal the demand as a result of the ncrease n prces have declned n Pakstan for food groups Tea, Baked tems, Chles, Other Spces, and Tobacco. It means consumers are unable to decrease the demand for these food tems consderably whenever there s an ncrease n prces and vce-versa. The compensated elastcty for Cereals has ncreased from to , ndcatng that consumers are shftng ther demand towards other food tems. In , the magntude of compensated elastctes s lower for Pulses, Potato, Other Vegetables, and Tobacco than that of Mlk, Meat, Chles, Other Spces and Beverages and Readymade food. It mples that the prce elastcty of hgh value food s hgher than that of other food tems. Wth the nflaton n food prces consumers wll shft ther demand towards commodtes wth lower own prce elastctes. In , the magntude of compensated elastctes for rural household s much lower for most of the food tems than that of urban households. It mples that wth nflaton n food prces, rural households wll be affected more than the urban households. However, f we look at the magntude of compensated elastctes for and for most of the food tems the elastcty estmates are hgher for urban households. It means that wth the passage 12

14 of tme, rural households are worse off n terms of consumpton of food tems assumng prce hkes. At Provncal level, n the compensated elastcty for Mlk s hghest and equal for Punjab and Baluchstan, followed by Sndh and KP. The compensated elastcty for Meat s also the hghest for Punjab n followed by Baluchstan, Sndh and KP. For the food groups Other Fruts and Beverages and Readymade food, the own prce elastcty ncreased for all the provnce from to except for Balochstan, however a lower ncrease s observed n case of Beverages category. Smlarly, the compensated elastcty for Potato and Tomato ncreased for all the Provnces wthn a perod of 15 years. In case of Chles, the Hcksan elastcty has declned for Sndh and Punjab, however, ncreased for KP and Baluchstan from to It can be observed that the compensated elastcty for Pulses declned consderably for Baluchstan (from to -0.38) from to ), however t ncreased for other Provnces. Across the food tems, the elastcty estmates for Mango s surprsng as t s aganst a- pror expectatons as they are hghly elastc n most of the cases. It used to be a necessty n and has become a luxury product n Lookng at the share of Mango, t can be seen form Table 2, that t has declned overall, at regonal and provncal level. On the other hand, the expendture elastcty for Mango also declned from to overall, at regonal and Provncal level except for Punjab ndcatng a lesser response from consumers n ther purchasng habt n response to change n ther real ncome. The ncome elastcty decreased substantally for Baluchstan so that Mango turned to be an nferor good for the provnce n , as ts ncome elastcty s negatve. The magntude of uncompensated and compensated elastcty of demand n case of mango concde, snce ts share n consumer s expendture s very low whch together wth the low ncome elastctes make the ncome effect neglgble Whle ntroducng the QUAIDS model, we put several restrctons to ensure the workablty of the model to be consstent wth mcroeconomc theory. We apply lkelhood rato, followng the lterature, to test valdty of the restrctons. We use the lkelhood rato test to test for = 0 whch reles on the and the unrestrcted model, whch s the most mportant test as far as valdty of the QUAIDS model s concerned. We reject the null hypothess of = 0 whch mples that QUAIDS s a vald model n our case. VI Concluson 13

15 Ths paper presents estmates usng QUAIDS for selected hortcultural products n Pakstan. The advantage of estmatng QUAIDS over the other flexble and non-flexble demand model s that t captures the nonlnearty n Engel curve, whch s a partcularly desrable property to have n the case of a developng country. We do ths exercse for the food groups n general and for selected hortculture products, Mango, Chles and Tomatoes. We fnd that the consumpton patterns have changed sgnfcantly over the last ffteen years. Household expendture shares have changed wth shfts from cereal food tems to dary products, mlk products and fruts and vegetables. In the case of our selected hortcultural products, there s a notable decrease n the share of expendtures on mangoes and chl, and an ncrease n tomatoes. We also see that there are wde dspartes n ncome elastctes at provncal level due to changes n the tastes and preferences of consumers. Wth the excepton of mango and chl, all other products have own prce elastctes less than 1 mplyng that these goods are necesstes n the household basket. Ths s true across provnces and the rural urban dvde. Mango used to be a necessty n but s no longer so n These provde the bass for understandng the lkely changes n future demand for these products and to formulate polces to beneft both producers and consumers of these products. References Abdula A (2002). Household Demand for Food n Swtzerland. A Quadratc Almost Local Demand System. Swss Journal of Economcs and Statstcs (SJES). 138(1): Ahmad E., and Ludlow S., (1987): Aggregate and regonal demand response patterns n Pakstan. The Pakstan Development Revew 26: Ahmad, E.; Ludlow S., and Stern N., (1988): Demand response n Pakstan: A modfcaton of the lnear expendture system for The Pakstan Development Revew 27: Banks, J., Blundell, R., Lewbel, A., (1997). Quadratc Engel curves and Consumer Demand. The Revew of Economcs and Statstcs 79, Alderman, H. (1988). Estmates of consumer prce response n Pakstan usng market prces as data. The Pakstan Development Revew, Al, M. S. (1985). Household consumpton and savng behavor n Pakstan: an applcaton of the extended lnear expendture system. The Pakstan Development Revew, Al M., and Abedullah. (1998): Supply, demand, and polcy envronment for pulses n Pakstan. The Pakstan Development Revew 37: Azz, B., Mudassar, K., Iqbal Z., and Hussan, I. (2011) Estmatng Food Demand Elastctes n Pakstan: An Applcaton of Almost Ideal Demand System. Forman Journal of Economc Studes 7, 1-24 Banks, J., Blundell, R., Lewbel, A., Quadratc Engel curves and consumer demand. The Revew of Economcs and Statstcs 79, Blundell, R., (1988). Consumer behavor: Theory and emprcal evdence - a survey. The Economc Journal 98, Blundell, R. and Robn, J. M. (1999). Estmaton n Large and Dsaggregated Demand Systems: An Estmator for Condtonally Lnear Systems. Journal of Appled Econometrcs. 14(3),

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18 Appendx Table 2: Changes n Food Consumpton Pattern n Pakstan Food Commodty Change% Cereals Overall Rural Urban Punjab Sndh Baluchstan KP Pulses Overall Rural Urban Punjab Sndh Baluchstan KP Edble Ols Overall Rural Urban Punjab Sndh Baluchstan KP Tea Overall Rural Urban Punjab Sndh Baluchstan KP Baked Items Overall Rural Urban Punjab Sndh Baluchstan KP Mlk & Mlk Products Overall Rural Urban Punjab Sndh Baluchstan KP Meat/Poultry Overall Rural Urban Punjab Sndh Baluchstan

19 Food Commodty Change% KP Mango Overall Rural Urban Punjab Sndh Baluchstan KP Other Fruts Overall Rural Urban Punjab Sndh Baluchstan KP Potato Overall Rural Urban Punjab Sndh Baluchstan KP Tomato Overall Rural Urban Punjab Sndh Baluchstan KP Other Vegetables Overall Rural Urban Punjab Sndh Baluchstan KP Chles Overall Rural Urban Punjab Sndh Baluchstan KP Other Spces Overall Rural Urban Punjab Sndh Baluchstan KP Sugar and ts Products Overall Rural

20 Food Commodty Change% Urban Punjab Sndh Baluchstan KP Beverages and Readymade food Overall Rural Urban Punjab Sndh Baluchstan KP Tobacco Overall Rural Urban Punjab Sndh Baluchstan KP

21 Tobacco Beverages & Readymade food Sugar Other Spces Chles Other Vegetables Tomato Potato Other Fruts Mango Meat Mlk and Products Baked Tea Edble Ols Pulses Cereals Table 3: Income Elastctes Area Year Pakstan Rural Urban Sndh KP Baluchstan Punjab

22 Tobacco Beverages & Readymade food Sugar Other Spces Chles Other Vegetables Tomato Potato Other Fruts Mango Meat Mlk and Products Baked Tea Edble Ols Pulses Cereals Pakstan Rural Urban Sndh KP Baluchstan Punjab Uncompensated Elastctes Area Year

23 Tobacco Beverages & Readymad Sugar Other Spces Chles Other Vegetables Tomato Potato Other Fruts Mango Meat Mlk and Products Baked Tea Edble Ols Pulses Cereals Pakstan Rural Urban Sndh KP Baluchstan Punjab Compensated Elastctes Area Year a