An error-corrected linear approximate almost ideal demand system model for imported meats and seafood in Indonesia

Abstract

The use of static-demand systems in empirical analysis assumes that consumers adjust immediately to a new long-run equilibrium path when a shock is encountered. However, adjustment is not always instantaneous. This paper utilizes an Error-Corrected Linear Approximate Almost Ideal Demand System (EC-LAAIDS) model to analyze the import demand for meat and seafood in Indonesia from 1976 to 2020 using annual data. The study found that the theoretical restrictions of homogeneity and symmetry held in the EC-LAAIDS model but did not in the long-run model. The adjustment parameter reveals that imported mutton had the slowest adjustment to long-run equilibrium, while all other meats and seafood had a moderate adjustment speed. The study calculated income elasticities for both the short- and long-run revealing that imported beef was a luxury good in the short-run and most responsive to changes in income. In the short-run, imported poultry was the least responsive to changes in income. In the long-run, all imported meats were found to be luxuries except for imported seafood and beef. Uncompensated price elasticity of demand reveals that in the short-run all imported items had inelastic demand except for imported beef which had elastic demand. In the long-run, however, imported beef and pork had elastic demand, while all other items were inelastic. Compensated cross-price elasticities found that mostly substitution relationships existed among pairs of imported commodities. Finally, a few policy suggestions were discussed, such as production subsidies to producers.