An Econometric Analysis of Consumer Demand in Australia

Abstract

Over the past two decades, Australian consumption patterns have changed for various reasons, including increases in consumers’ real income; rising consumers’ demand for goods and services; and technical and structural changes in the Australian economy. Economic reforms, such as the restructure and deregulation of a range of service industries, reduction in the level of trade protection provided to goods-producing industries, reductions in tax concessions and subsidies to agricultural sectors, have resulted in substantial changes in the relative prices of consumer goods and services. Removal of trade barriers has provided Australian households and businesses access to cheap imported goods like food, clothing and durables. This would, in turn, equate to an increasing re-allocation of consumer income to different goods and services such as health care, education, transport, recreation and financial services. In light of this situation, it is essential to have up-to-date income and price elasticity estimates for Australian consumer goods as they are the key inputs for a number of applications, such as changes to public finance policies and estimation of economy-wide models. A review of the existing literature on the topic reveals that there are several highly influential cross-country studies which provide an analysis of Australian consumption patterns for various time periods ranging between 1943 and 1996. The first part of this thesis considers all consumer goods grouped into ten main broad aggregates, namely that of food, alcohol and tobacco, clothing, housing, durables, medical care, transport and communication, recreation, education, and miscellaneous. It presents an analysis of the Australian consumption patterns of these ten groups using three different demand systems, the Rotterdam model, the CBSmodel, and the AIDS. As well, we test the two important economic theories of consumer demand, that of demand homogeneity and Slutsky symmetry as well as the preference independence utility structure. The test results of these hypotheses shows that the implied income and price elasticities for the ten commodities, presented in this chapter, support the two hypotheses.