• ### Income and Price Elasticities of Demand for Broad Consumption Items in African Countries

Charles Leyeka Lufumpa, Marc Koffi Kouakou, Désiré Kouamé Kanga

Abstract:

The study looks at the responses of African households of different income levels to changes in their incomes and prices of the commodities they consume. The study utilizes data on prices collected by the African Development Bank through its 2011 international comparison program implemented in 50 African countries. The data was mostly collected on a monthly basis over a period of 15 months ranging from January 2011 to march 2012. The data covered 12 broad consumption item groups and over 1,036 products in 50 African countries that are classified in two groups: (i) the low income group with per capita income levels of under US $3,115 and (ii) the higher income group of countries with per capita income levels above US$3,115.

The 12 broad consumption groups include: food and non-alcoholic beverages; alcoholic beverages, tobacco and narcotics; clothing and footwear; housing, water, electricity, gas and other fuels; furnishings, household equipment and routine household maintenance; health; transport; communication; recreation and culture; education; restaurants and hotels; miscellaneous goods and services and net purchases abroad. The food category, which includes staples such as maize, bread and rice, comprises about a third of the items and approximately half of the consumption expenditure by households across Africa.

The study utilizes a two-stage cross-country demand model to estimate the aggregate demand systems for the broad consumption categories as well as the food sub-category. In the first stage of estimation, an aggregate demand system is generated using the Florida preference independence model. In the second stage, the Florida Slutsky model is used to generate a demand system for the food sub-category. The own price and income elasticities were computed using the procedure and formula outlined by Seale et al. (2003).

The study confirms that “food & non-alcoholic beverages” and “clothing and footwear” are necessary consumption items for African households. All other consumption categories, including education, are deemed as luxuries. Overall, the study shows that when total expenditure on all categories of goods and services increases by 1%, African households will tend to decrease their budget share for food by an average of 17.81 basis points in low income countries and 25.65 basis points in higher income countries.

In addition, “bread and cereals”, “fish”, “oils and fats” and “other food” are expenditure inelastic. In other words, an increase in the prices of these items results in an increase in total expenditure on each of these items. At the same level of income, households reallocate their budgets by reducing the consumption of other consumption categories (including on education and health) in preference for food, non-alcoholic beverages, clothing and footwear. This information on household consumption patterns and how they are affected by changes in household incomes and in the prices of goods and services in the economy can be helpful in informing public policies, especially those aimed at safeguarding the welfare of poor and marginalized households most affected by changes in price and income levels.  Ensuring price stability for items that comprise the majority of the poor’s consumption baskets could go a long way in enhancing food security and household welfare.

Keywords: Consumption, two-stage cross-country demand model, food demand, elasticity, International Comparison Program.