Dynamic modelling of consumption patterns using LA-AIDS:: a comparative study of developed versus developing countries

Saroja Selvanathan; Maneka Jayasinghe; E.A. Selva Selvanathan; Shashika D. Rathnayaka

doi:10.1007/s00181-023-02465-z

Dynamic modelling of consumption patterns using LA-AIDS: a comparative study of developed versus developing countries

Saroja Selvanathan, Maneka Jayasinghe^* (Corresponding Author), E.A. Selva Selvanathan, Shashika D. Rathnayaka

^*Corresponding author for this work

The Rowett Institute of Nutrition and Health

Research output: Contribution to journal › Article › peer-review

Abstract

The traditional applied demand system estimation assumes that when consumer income and commodity prices change, the consumers instantaneously fully adjust to a new consumption equilibrium level and use a static demand system such as Static Linear Almost Ideal Demand System (Static LA-AIDS) for estimation. However, in real-life situations, such an assumption does not hold as consumers take time to settle to a new consumption equilibrium level. Hence, dynamic demand system estimations generate more nuanced insights into the short-run dynamics of consumer demand. This paper estimates two forms of dynamic versions of AIDS, Dynamic LA-AIDS and the error-corrected LA-AIDS, and compares the results with the Static LA-AIDS. The paper also models the consumption patterns of consumers in developed and developing countries and provides a comparative analysis of implied elasticities using recent data. The results show that the dynamic models support demand theory hypotheses—demand homogeneity and Slutsky symmetry—more than the static model. The estimated mean own-price elasticities reveal that the demand in the short-run and long-run is price inelastic across all countries. Long-run and short-run income elasticities demonstrated notable variation across various commodity groups and country groups. For example, the restaurant meal is a luxury in the short-run for all countries. In the long-run, it is a necessity in developed countries and a luxury in developing countries. Food and housing are necessities; durables, transport and recreation are luxuries in developed and developing countries in the long-run and short-run.

Original language	English
Pages (from-to)	75-135
Number of pages	61
Journal	Empirical Economics
Volume	66
Early online date	8 Aug 2023
DOIs	https://doi.org/10.1007/s00181-023-02465-z
Publication status	Published - Jan 2024

Bibliographical note

Acknowledgements
The authors would like to thank the anonymous referees and the editor of this journal for their constructive comments on an earlier version of the paper. We also thank Ms. Tanya Parker for editorial assistance. The authors also gratefully acknowledge the internal grants received from the Griffith Asia Institute and the COVID-19 Supplementary Funding Pool Scheme from Charles Darwin University to undertake this research.

Funding
Open Access funding enabled and organized by CAUL and its Member Institutions. This research did not receive any specific grant from funding agencies in the public, commercial or not-for-profit sectors.

Data Availability Statement

Supplementary Information The online version contains supplementary material available at https://doi.org/10.1007/s00181-023-02465-z.

Keywords

Dynamic demand
Error correction
Developing and developed countries
Demand elasticities

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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Cite this

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title = "Dynamic modelling of consumption patterns using LA-AIDS:: a comparative study of developed versus developing countries",

abstract = "The traditional applied demand system estimation assumes that when consumer income and commodity prices change, the consumers instantaneously fully adjust to a new consumption equilibrium level and use a static demand system such as Static Linear Almost Ideal Demand System (Static LA-AIDS) for estimation. However, in real-life situations, such an assumption does not hold as consumers take time to settle to a new consumption equilibrium level. Hence, dynamic demand system estimations generate more nuanced insights into the short-run dynamics of consumer demand. This paper estimates two forms of dynamic versions of AIDS, Dynamic LA-AIDS and the error-corrected LA-AIDS, and compares the results with the Static LA-AIDS. The paper also models the consumption patterns of consumers in developed and developing countries and provides a comparative analysis of implied elasticities using recent data. The results show that the dynamic models support demand theory hypotheses—demand homogeneity and Slutsky symmetry—more than the static model. The estimated mean own-price elasticities reveal that the demand in the short-run and long-run is price inelastic across all countries. Long-run and short-run income elasticities demonstrated notable variation across various commodity groups and country groups. For example, the restaurant meal is a luxury in the short-run for all countries. In the long-run, it is a necessity in developed countries and a luxury in developing countries. Food and housing are necessities; durables, transport and recreation are luxuries in developed and developing countries in the long-run and short-run.",

keywords = "Dynamic demand, Error correction, Developing and developed countries, Demand elasticities",

author = "Saroja Selvanathan and Maneka Jayasinghe and Selvanathan, {E.A. Selva} and Rathnayaka, {Shashika D.}",

note = "Acknowledgements The authors would like to thank the anonymous referees and the editor of this journal for their constructive comments on an earlier version of the paper. We also thank Ms. Tanya Parker for editorial assistance. The authors also gratefully acknowledge the internal grants received from the Griffith Asia Institute and the COVID-19 Supplementary Funding Pool Scheme from Charles Darwin University to undertake this research. Funding Open Access funding enabled and organized by CAUL and its Member Institutions. This research did not receive any specific grant from funding agencies in the public, commercial or not-for-profit sectors.",

year = "2024",

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doi = "10.1007/s00181-023-02465-z",

language = "English",

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T2 - a comparative study of developed versus developing countries

AU - Selvanathan, Saroja

AU - Jayasinghe, Maneka

AU - Selvanathan, E.A. Selva

AU - Rathnayaka, Shashika D.

N1 - Acknowledgements The authors would like to thank the anonymous referees and the editor of this journal for their constructive comments on an earlier version of the paper. We also thank Ms. Tanya Parker for editorial assistance. The authors also gratefully acknowledge the internal grants received from the Griffith Asia Institute and the COVID-19 Supplementary Funding Pool Scheme from Charles Darwin University to undertake this research. Funding Open Access funding enabled and organized by CAUL and its Member Institutions. This research did not receive any specific grant from funding agencies in the public, commercial or not-for-profit sectors.

PY - 2024/1

Y1 - 2024/1

N2 - The traditional applied demand system estimation assumes that when consumer income and commodity prices change, the consumers instantaneously fully adjust to a new consumption equilibrium level and use a static demand system such as Static Linear Almost Ideal Demand System (Static LA-AIDS) for estimation. However, in real-life situations, such an assumption does not hold as consumers take time to settle to a new consumption equilibrium level. Hence, dynamic demand system estimations generate more nuanced insights into the short-run dynamics of consumer demand. This paper estimates two forms of dynamic versions of AIDS, Dynamic LA-AIDS and the error-corrected LA-AIDS, and compares the results with the Static LA-AIDS. The paper also models the consumption patterns of consumers in developed and developing countries and provides a comparative analysis of implied elasticities using recent data. The results show that the dynamic models support demand theory hypotheses—demand homogeneity and Slutsky symmetry—more than the static model. The estimated mean own-price elasticities reveal that the demand in the short-run and long-run is price inelastic across all countries. Long-run and short-run income elasticities demonstrated notable variation across various commodity groups and country groups. For example, the restaurant meal is a luxury in the short-run for all countries. In the long-run, it is a necessity in developed countries and a luxury in developing countries. Food and housing are necessities; durables, transport and recreation are luxuries in developed and developing countries in the long-run and short-run.

AB - The traditional applied demand system estimation assumes that when consumer income and commodity prices change, the consumers instantaneously fully adjust to a new consumption equilibrium level and use a static demand system such as Static Linear Almost Ideal Demand System (Static LA-AIDS) for estimation. However, in real-life situations, such an assumption does not hold as consumers take time to settle to a new consumption equilibrium level. Hence, dynamic demand system estimations generate more nuanced insights into the short-run dynamics of consumer demand. This paper estimates two forms of dynamic versions of AIDS, Dynamic LA-AIDS and the error-corrected LA-AIDS, and compares the results with the Static LA-AIDS. The paper also models the consumption patterns of consumers in developed and developing countries and provides a comparative analysis of implied elasticities using recent data. The results show that the dynamic models support demand theory hypotheses—demand homogeneity and Slutsky symmetry—more than the static model. The estimated mean own-price elasticities reveal that the demand in the short-run and long-run is price inelastic across all countries. Long-run and short-run income elasticities demonstrated notable variation across various commodity groups and country groups. For example, the restaurant meal is a luxury in the short-run for all countries. In the long-run, it is a necessity in developed countries and a luxury in developing countries. Food and housing are necessities; durables, transport and recreation are luxuries in developed and developing countries in the long-run and short-run.

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KW - Error correction

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KW - Demand elasticities

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