An Estimation of Engel’s Food Elasticity of Demand across Urban, Rural and Estate Sectors in Sri Lanka

Abstract

Engel’s Food elasticity of demand is one of the indicators of food consumption behaviour. Identifying food consumption patterns in sectors, this study aims to estimate Engel's food elasticity of demand among sectors in Sri Lanka. For that purpose, microdata was gathered from the Household Income and Expenditure Surveys of 2006/7, 2009/10, 2012 and 2016 with a total of 13,881 households selected from Badulla, Kandy, Nuwara-Eliya and Ratnapura districts. Households were chosen from the urban - 2010, rural - 8508 and estate – 3363 sectors. A quadratic double-log model based on the OLS techniques was applied in the analysis, while the Wald test was involved to find out that explanatory variables are significant in a model. Twelve quadratic double log models were estimated and they were strongly significant. All estimated Engel food elasticity of demands were strongly significant and less than unity in all three sectors while showing a marginally decreasing pattern over time. The estate sector demonstrated a relatively higher Engel food elasticity as food expenditure was more responsive to income changes than in the other two sectors. Further, the household size, age and education elasticities were obtained from the model. All the household size elasticities were positive and strongly significant in all three sectors. Age and education elasticities indicated negative signs for all three sectors in some periods. The results revealed that estimated Engel food elasticities were positive and less than unity, so it conformed with Engel's law. Hence, the government can promote relevant income opportunities in sectors to increase family income and pay special attention to designing tax policies on foods.