Demand for food products in Finland: A demand system approach

Abstract

The study was concerned with the estimation of food-demand parameters in a system context. The patterns of food consumption in Finland were presented over the period 1950-1991, and a complete demand system of food expenditures was estimated. Price and expenditure elasticities of demand were derived, and the results were used to obtain projections on future consumption. While the real expenditure on food has increased, the budget share of food has decreased. In the early 19505, combined Food-at-Home and Food-away-from-Home corresponded to about 40% of consumers’ total expenditure. In 1991 the share was 28%. There was a shift to meals eaten outside the home. While the budget share of Food-away-from-Home increased from 3% to 7% over the observation period, Food-at-Home fell from 37% to 21%, and Food-at-Home excluding Alcoholic Drinks fell from 34% to 16%. Within Food-at-Home, the budget shares of the broad aggregate groups, Animalia (food from animal sources), Beverages, and Vegetablia (food from vegetable sources), remained about the same over the four decades, while structural change took place within the aggregates. Within Animalia, consumption shifted from Dairy Products (other than Fresh Milk) to Meat and Fish. Within Beverages, consumption shifted from Fresh Milk and Hot Drinks to Alcoholic Drinks and Soft Drinks. Within Vegetablia, consumption shifted from Flour to Fruits, while the shares of Bread and Cake and Vegetables remained about the same. As the complete demand system, the Almost Ideal Demand System (AIDS) was employed. The conventional AIDS was extended by developing a dynamic generalisation of the model and allowing for systematic shifts in structural relationships over time. A four-stage budgeting system was specified, consisting of seven sub-systems (groups), and covering 18 food categories. Tests on parameter restrictions and misspecification tests were used to choose the most preferred model specification for each group. Generally, the estimated models did not satisfy the Slutsky conditions. The goodness-of-fit measures were good, and, compared to static specifications, dynamics usually provided a better fit. The misspecification tests indicated that the dynamic specification was correct, but some form of misspecification was found. The structural change in parameters indicated that the modelling failed to track a stable preference structure - if there is one. The estimated demand system was employed in projecting the future consumption of food products in Finland to the year 2000. The approach was to choose a certain change in the real total consumption expenditure and alternative sets of relative prices for the forecast period. Four different options of price variables were defined. Three of the options relied on the historical price trends recorded in Finland, whereas one option measured the expected consequences of Finland's possible membership in the European Union. A predicted consequence of the membership in the European Union is that the share of food in consumers’ budget would decrease. The expected decrease is somewhat faster than the decrease that would take place if future price developments were based on the historical trends. If Finland joins the Union, the budget share of Food-at-Home would decrease from 21% in 1991 to 18% in 2000, whereas the budget share of Food-at-Home excluding Alcoholic Drinks would decrease from 16% in 1991 to 14% in 2000.