ESTAMAING PRICE AND EXPENDITURE ELASTICITIES FOR MAJOR FOODS IN EGYPT DURING THE PERIOD (1980-2014) USING THE LINEAR ALMOST IDEAL DEMAND SYSTEM

Abstract

The objective of this research is to estimate price (direct and cross) and expenditure elasticities for major food commodities in Egypt. The food commodities are divided into six sub-models depending on the homogeneity within each group of commodities and the data availability quantities consumed and the corresponding retail prices for each individual item. Some commodities are aggregated in groups such as other beans, other vegetables, fruits(1), fruits(2) and oils. The Linear Almost Ideal Demand System (LAIDS) model is applied in estimating a system of demand equations for each group of food commodities. To avoid the invalid inference and spurious regression problems that may be created by non-stationary data series, the Fully Modified Least Squares (FMLS) estimator is utilized. The demand parameters satisfy the Engel aggregation, cournot aggregation, homogeneity and symmetry conditions. The results indicate that expenditure elasticities of the majority of food commodities/groups are less than the unity except fot the fruits2 (1.110), indicating necessity effects. This can be also interpreted as following the increasing of consumptions of these commodities is strongly connected with increasing of all income levels. The results also show that the own price elasticities for food commodities/groups are inelastic. For fruits 2, its inelastic own price elasticity still indicates that it tends to be very sensitive to price changes. The relative high cross price elasticities in all sub-models illustrate the strong substitute or complementary effects of the price change of one commodity one quantities consumed from other commodities in the same sub-models. Therefore, structural implications from the estimated elasticities are important. The estimated own and cross price and expenditure elasticities must be analyzed during the economic reform for better understanding all economic changes affecting prices as well as consumption and expenditures.