Expenditure Elasticities

Expenditure elasticities on food groups were calculated at sample mean. The results were presented in Table 6.33. In this table each of food group was cross tabulated across income groups and areas. The point estimates imply that increased expenditure on food by one per cent per household per week was associated with an increase of budget share indicated by elasticity coefficient of each food group. The coefficient estimates of total food expenditure lent support for a strong income or wealth effect on changing budget share.

This finding reinforces the view of the World Bank saying that raising income as the critical factor in improving food and health status in poor countries.

As can be followed in the table, some food groups indicated a clear type of expenditure elasticity, while the other groups were found to have a mixed one. In this group were 1. Rice, meat, edible oil, egg and milk, and legume which tended to belong to necessities,

irrespective of the income groups and, survey periods, and survey areas;

2. Tobacco and prepared food were luxurious.

3. The rest of food groups, i.e., fish, non-rice staple, fruits and vegetables, and spices, are found to have mixed expenditure elasticities depends on income groups, survey periods, and survey areas.

It is our interest, to know how the expenditure elasticities of each food groups change over the time of survey, across space and income groups: Is there any pattern to follow? One by one food group observations indicated that it is hard to draw a unique pattern. However, we have tried to group the pattern according to a variation over time, across income group and across areas.

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Table 6.33 Expenditure Elasticities of Food Demand Across areas and Income Groups

Based on the SUSENAS Data: 1990, 1993, 1996 and 1999 East Java, Indonesia

FOOD GROUPS

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 Variation over Time

The following pattern is identified:

1. Patter A: Expenditure elasticities rise over time of survey.

In rural area, food group following this patter is rice in lower and higher income groups. Those belong to the middle income group did not follow this pattern.

In urban area, this pattern was found among households of lower income group.

2. Pattern B: Expenditure elasticities decline over time of survey.

In rural area, food groups for which the expenditure elasticities performed this pattern are fish in lower and middle income groups, meat in lower income group, Eggs and Milk in middle income group, ―fruits and vegetables‖ and ―edible oil‖ in lower and higher income, and spices in all of income groups.

In urban area, food groups for which the expenditure elasticities follows this pattern are eggs and milk in lower and higher income groups, fruits and vegetables in middle and higher income groups, edible oil in lower income group, prepared foods in lower income group, and spices in all income groups.

3. Pattern C: the expenditure elasticities first decline and then rise:

In rural area: food groups for which the expenditure elasticities performed this pattern are non-rice staple in all income groups, fish in higher income group,

In urban area, the food group for which the expenditure elasticities follow this pattern is non-rice staple in middle income group.

4. Pattern D: the expenditure elasticities first rise and the decline.

In rural area: food groups for which the expenditure elasticities performed this pattern are legume in middle income groups, meat in middle income group;

In urban area, food groups for which the expenditure elasticities follow this pattern are legume in middle income group, edible oil in middle income group.

 Variation across Income Groups

A similar pattern is performed across income groups. The pattern of expenditure elasticities might be characterized as:

1. Pattern A: expenditure elasticities rise across income groups.

In rural area: only rice in 1996 performs this pattern of development.

In urban area: only spice in 1993 performs this pattern of development.

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2. Pattern B: expenditure elasticities decline across income groups:

In rural area: non-rice staples in 1996 and prepared food in 1999 perform this pattern of development.

In urban area: eggs and milk in 1999, tobacco in 1993, and prepared foods in 1993 perform this pattern of development.

3. Pattern C: expenditure elasticities fall and then rise, as income group moves from the lower, middle to the higher.

In rural area, expenditure elasticities with this pattern were found in food groups of meat, egg and milk, Legume in 1990, 1996 and 1999, fruits and vegetables, tobacco in 1993 and 1996.

In urban area, those to which expenditure elasticities performed this pattern are, fish in 1990, 1996, and 1999, meat in all years, Eggs and milk in 1990 to 1996, legume in 1990 and 1993, fruits and vegetables in 1993 and 1999.

4. Pattern D: expenditure elasticities rise, and then fall, as income group move from the lower, middle to the higher group.

In rural area, food groups of which the expenditure elasticities followed this pattern are rice, in 1993, fish in 1990, 1993, 1996, Legume in 1996, Tobacco, in 1999, prepared food in 1990 and 1996, and spice in 1990 and 1996.

In urban area, food groups of which the expenditure elasticities revealed this pattern are, rice in all years of survey, non-rice staple, in all years of survey, fish in 1993, legume in 1996, Edible oil in 1993 and 1996, tobacco in 1990 and 1999, prepared food in 1990 and 1999, and spices in 1990, 1996 and 1999.

The other pattern, namely a steady increase, a steady decrease are also performed but not so frequent.

What we could delineate from observing the pattern is that the development in expenditure elasticities is not regular. There is no grand pattern representing a large section of the observation units.

This irregularity in the pattern may be explained in term of both quantitative and qualitative changes in the household consumption baskets. For a given, quality of a commodity, the immediate concern of household is to consume that commodity up to a certain minimum desired level. If the households are not consuming the preferred commodity in the desired

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minimum amount then expenditure on that commodity increases with an increase in the level of income. Once households have achieved that desired level, given the quality of commodity, the expenditure share of that commodity in total household expenditure declines as income increases. However, as income continue to increase, households may switch to better quality of the commodity and thus expenditure on the commodity starts to increase again. This pattern is repeated as incomes continue to increase even further. In other words, as long as there are various qualities available in the market, the irregularity will exist.

Pattern A in which expenditure elasticities rise along the increase of income level may represent a situation in which the households did not consume the goods in the desired minimum amount. For a ggiven quality, the household desire to first consume a minimum amount of good. As long as this desired minimum amount of good is not yet achieved, the expenditure elasticity will rise as income level of the household increases. The reflection is increasing expenditure elasticity across income level.

Pattern B, the decreasing expenditure elasticity, may represent a well-known Engel‘s Law.

The household in this situation starts to consume the food good in the desired minimum amount, for a given quality. As the income level increases, the expenditure elasticity on that food decreases.

Pattern C, in which expenditure elasticity first falls and then rises, as income group moves to a higher level, may represent a situation, in which a household has started consuming food good at minimum amount. So it started first to reduce the consumption of food good of a given quality. Therefore, the expenditure elasticity declines. As the income level further rises, the household switchs to the food group of higher quality

Based on the above estimates assessment, we suggest that households in different income groups performed different patterns and that in general, they alter their consumption bundles both quantitatively and qualitatively in response to changes in income.

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