Consumer expenditure structure: Analysis based on extended linear expenditure system

Abstract

This study has analyzed the consumer demand and expenditure structure of commodities concerning the income of the sampled households using the Extended Linear Expenditure System Model. Budget shares and expenditure elasticities were estimated for household consumption categories allowing for a comparison of expenditure elasticities between the two seasons. Expenditure elasticities for consumer expendables, durables, and transport were highly elastic. Tradable and non-tradable non-farm goods are highly expenditure elastic indicating that an increase in household income will result in a proportionately greater increase in expenditure on it. Increased expenditure on non-tradable goods and services may stimulate local production and create new employment and enterprise opportunities, while the increased expenditure on tradable goods represents a leakage of income from the local economy. An increase in farm incomes has the potential to stimulate economic growth through the stimulation of increased local production of non-farm goods and services. Increased income will also result in increased expenditure on goods not locally produced, which means leakage of income from the local economy. Increased production is limited by factors such as insecure tenure and cash flow problems that are amplified by high transaction costs associated with obtaining credit. Better access to credit would improve cash flow problems somewhat, but transaction costs need to be lowered through the improvement of physical and institutional infrastructure. Demand-led growth needs to be strengthened with the production of goods not currently produced. Processing raw food materials into more convenient items would encourage increased local expenditure with increased income and possibly reduce the leakage of income from the local economy. The diversification into non-farm activities such as product processing requires investment and poses a risk. Insecure tenure creates a disincentive to investment as producers are not guaranteed the benefits from their investment. Public policy should focus on alleviating tenure security and institutional infrastructure to strengthen the potential for demand-led growth. These results may be valid for any underdeveloped/developing agrarian regions or economy of the globe.