Volume 21, Issue 81 (8-2021)
refahj 2021, 21(81): 287-327 |
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vaez mahdavi Z, raghfar H, emami K, haji nabi K. (2021). Food Items Elasticity Estimation for Income Quantiles in Iran,
2016 and 2018. refahj. 21(81), 287-327.
URL: http://refahj.uswr.ac.ir/article-1-3851-en.html
URL: http://refahj.uswr.ac.ir/article-1-3851-en.html
Keywords: Income elasticity of demand, Price elasticity of demand, Almost Ideal Demand System, Income quantile.
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Introduction: Macroeconomic instability, exchange rate volatility, high inflation and consequently rising food price have been critical issues in recent years in Iran’s economy. The high share of food consumption in household budget, specifically for low-income groups, highlights the importance of price stability. Inconsistent models in public policy and decision-making result in various uncertainties. Policy inefficiencies, policy inconsistency, and food price fluctuations have affected vulnerable households and low-income groups and increased food poverty, undernourishment and malnutrition. The study of income and price elasticities of food items, especially in different income groups, provides valuable information for policy making (Ikuemonisan et al., 2018). In general, the dynamics of fluctuations in the food market are reactions to different types of news, including exchange rate volatility (Nwoko, 2016; Fogarasi, 2011, Chit et al., 2010).
High food prices are a threat to the livelihood of many households, especially poor households in developing countries, which spend between 60 to 80 percent of their total budget on food items (Ivanic & Martin, 2008; Von Braun, 2008). Changes in household food consumption habits as a result of the cost push of food inflation, can become a precursor to food insecurity and food poverty, which will undoubtedly have an impact on the well-being of the low-income households. People with food insecurity will be vulnerable to many physical, psychological and financial problems. Thinking about food security, food is no longer just a matter of satiety or calorie intake, as it must also provide vitamins and micronutrients.
Figures 1 and 2 indicate the inflation rate (CPI) and food inflation during the years 2016-2020 respectively.
Figure 1: Inflation in Iran during the years 2016-2020
Source: tradingeconomics.com
A jump in exchange rate has been one of the most important cost push inflation factors in Iran, which changes relative prices and hence household consumption. Due to a jump in the exchange rate in 2018, the changes of income and price elasticities of food items in households’ consumption baskets in 2016 and 2018 are compared to those of in 2016.
Figure 2: Food in inflation in Iran during the years 2016-2020
Source: tradingeconomics.com
Method: The relevance of food security on people’s health status is a determining factor to study the income and price elasticities of food items in different income groups that provide valuable information for policy making. To this end, using Almost Ideal Demand System approach, the elasticity of food items for different income quantiles of the household’s consumption baskets are calculated for the years 2016 and 2018. The Almost Ideal Demand System suggested by Deaton and Muellbauer (1980) is applied to study income and price elasticities. In this study, household survey data for 2016 and 2018 are used which are collected annually by the Statistics Center of Iran(SCI). Due to the heterogeneous impacts of price changes on demand for food items for different income groups, the study was conducted for different income quantiles. For this purpose, from within the total items of the household food basket and due to some restriction from price indicators, this study focuses on the items of meat, bread, and dairy products. In order to consider household preferences according to the economic and social characteristics of households, demographic variables are also considered in the model.
Commodity price indices in different urban areas of the provinces of the country have been extracted and used from statistical yearbooks published by the Statistics Center of Iran.
Findings: Results of the study indicate that bread is identified as a low-elasticity commodity. The price elasticity of dairy and meat in the two years under review is greater than one. Hence, these are goods with a high elasticity of demand. This indicates that demand for these goods fluctuates sharply as prices change. The results of quantile analysis show that in 2018, bread was a Giffen good for the first quantile and the necessary good for the third and the fifth. The income elasticity of bread in the first quantile for 2016 and 2018, respectively -0.465 and -1.239, shows that bread is an inferior good for the first quantile of households, while for the third and fifth the same index is a positive value between zero and one and indicates that bread is necessary good for these groups. In the first quintile, the price elasticity of bread in 2018 is positive and significant and shows that bread is considered as a Giffen for them.
Accordingly, bread has become a low and Giffen good in 2018, while for the third and fifth quintiles, income elasticity is between zero and one, and it is considered an essential good. The price elasticity of demand has a negative value and commodity it is considered low elasticity good.
The results also show that dairy is a necessary good for all quantiles, while meat was a luxury good for the first quantile and essential for the third and fifth quantiles. The share of bread, dairy, meat and other food expenditures of total household expenditures in 2016 and 2018 are almost 29%.
On average, the share of food items in the total household expenditures for the first, third, and fifth quantile in 2018 are 32.3, 29.4 and 28.2 percent, respectively. The average share of housing expenditure, as a necessary commodity, of the total household expenditure in the years under review has been around 30% and in the first quantile, which is higher for the first quantile and a bit lower for the third and the fifth quantiles.
Discussion: Bread as a most commonly used food item is a necessary commodity. Therefore, it is essential that its availability and price monitored, since an inelastic commodity its higher price puts direct pressure on households’ budget and changes the price of this product has a severe consequence in composition of the consumption items of households’ baskets, particularly for low-income households’ group. Consumption of dairy products and meat in the household food basket as micronutrients Contributes to promote human health and growth. Food insecurity, on the one hand, can lead to instability and political and social imbalances, and on the other hand, the country’s dependence on food imports can make it vulnerable.
As a result, the households well-being improvement, which is a main public policy target, can be achieved through improvement of the purchasing power of the households setting an efficient system of regulating the prices of basic the goods, reducing inflation, particularly for the food items. These measures assure the higher quality of nutrition, food security a better health status for the households’ members.
Ethical considerations of the authors:
Contribution of authors
All authors have contributed to this article.
Funding for article preparation
This article is taken from the dissertation “The impact of the exchange rate shock on households’ food expenditure: Agent-Based approach” sponsored by the Higher Institute for Iranian Social Security Organization (ISSO), No. 20002182 contract.
Conflict of interest
This article does not overlap with other published works by the authors.
Follow the ethics of research
In this article all rights related to research ethics are respected.
Introduction: Macroeconomic instability, exchange rate volatility, high inflation and consequently rising food price have been critical issues in recent years in Iran’s economy. The high share of food consumption in household budget, specifically for low-income groups, highlights the importance of price stability. Inconsistent models in public policy and decision-making result in various uncertainties. Policy inefficiencies, policy inconsistency, and food price fluctuations have affected vulnerable households and low-income groups and increased food poverty, undernourishment and malnutrition. The study of income and price elasticities of food items, especially in different income groups, provides valuable information for policy making (Ikuemonisan et al., 2018). In general, the dynamics of fluctuations in the food market are reactions to different types of news, including exchange rate volatility (Nwoko, 2016; Fogarasi, 2011, Chit et al., 2010).
High food prices are a threat to the livelihood of many households, especially poor households in developing countries, which spend between 60 to 80 percent of their total budget on food items (Ivanic & Martin, 2008; Von Braun, 2008). Changes in household food consumption habits as a result of the cost push of food inflation, can become a precursor to food insecurity and food poverty, which will undoubtedly have an impact on the well-being of the low-income households. People with food insecurity will be vulnerable to many physical, psychological and financial problems. Thinking about food security, food is no longer just a matter of satiety or calorie intake, as it must also provide vitamins and micronutrients.
Figures 1 and 2 indicate the inflation rate (CPI) and food inflation during the years 2016-2020 respectively.
Figure 1: Inflation in Iran during the years 2016-2020
Source: tradingeconomics.com
A jump in exchange rate has been one of the most important cost push inflation factors in Iran, which changes relative prices and hence household consumption. Due to a jump in the exchange rate in 2018, the changes of income and price elasticities of food items in households’ consumption baskets in 2016 and 2018 are compared to those of in 2016.
Figure 2: Food in inflation in Iran during the years 2016-2020
Source: tradingeconomics.com
Method: The relevance of food security on people’s health status is a determining factor to study the income and price elasticities of food items in different income groups that provide valuable information for policy making. To this end, using Almost Ideal Demand System approach, the elasticity of food items for different income quantiles of the household’s consumption baskets are calculated for the years 2016 and 2018. The Almost Ideal Demand System suggested by Deaton and Muellbauer (1980) is applied to study income and price elasticities. In this study, household survey data for 2016 and 2018 are used which are collected annually by the Statistics Center of Iran(SCI). Due to the heterogeneous impacts of price changes on demand for food items for different income groups, the study was conducted for different income quantiles. For this purpose, from within the total items of the household food basket and due to some restriction from price indicators, this study focuses on the items of meat, bread, and dairy products. In order to consider household preferences according to the economic and social characteristics of households, demographic variables are also considered in the model.
Commodity price indices in different urban areas of the provinces of the country have been extracted and used from statistical yearbooks published by the Statistics Center of Iran.
Findings: Results of the study indicate that bread is identified as a low-elasticity commodity. The price elasticity of dairy and meat in the two years under review is greater than one. Hence, these are goods with a high elasticity of demand. This indicates that demand for these goods fluctuates sharply as prices change. The results of quantile analysis show that in 2018, bread was a Giffen good for the first quantile and the necessary good for the third and the fifth. The income elasticity of bread in the first quantile for 2016 and 2018, respectively -0.465 and -1.239, shows that bread is an inferior good for the first quantile of households, while for the third and fifth the same index is a positive value between zero and one and indicates that bread is necessary good for these groups. In the first quintile, the price elasticity of bread in 2018 is positive and significant and shows that bread is considered as a Giffen for them.
Accordingly, bread has become a low and Giffen good in 2018, while for the third and fifth quintiles, income elasticity is between zero and one, and it is considered an essential good. The price elasticity of demand has a negative value and commodity it is considered low elasticity good.
The results also show that dairy is a necessary good for all quantiles, while meat was a luxury good for the first quantile and essential for the third and fifth quantiles. The share of bread, dairy, meat and other food expenditures of total household expenditures in 2016 and 2018 are almost 29%.
On average, the share of food items in the total household expenditures for the first, third, and fifth quantile in 2018 are 32.3, 29.4 and 28.2 percent, respectively. The average share of housing expenditure, as a necessary commodity, of the total household expenditure in the years under review has been around 30% and in the first quantile, which is higher for the first quantile and a bit lower for the third and the fifth quantiles.
Discussion: Bread as a most commonly used food item is a necessary commodity. Therefore, it is essential that its availability and price monitored, since an inelastic commodity its higher price puts direct pressure on households’ budget and changes the price of this product has a severe consequence in composition of the consumption items of households’ baskets, particularly for low-income households’ group. Consumption of dairy products and meat in the household food basket as micronutrients Contributes to promote human health and growth. Food insecurity, on the one hand, can lead to instability and political and social imbalances, and on the other hand, the country’s dependence on food imports can make it vulnerable.
As a result, the households well-being improvement, which is a main public policy target, can be achieved through improvement of the purchasing power of the households setting an efficient system of regulating the prices of basic the goods, reducing inflation, particularly for the food items. These measures assure the higher quality of nutrition, food security a better health status for the households’ members.
Ethical considerations of the authors:
Contribution of authors
All authors have contributed to this article.
Funding for article preparation
This article is taken from the dissertation “The impact of the exchange rate shock on households’ food expenditure: Agent-Based approach” sponsored by the Higher Institute for Iranian Social Security Organization (ISSO), No. 20002182 contract.
Conflict of interest
This article does not overlap with other published works by the authors.
Follow the ethics of research
In this article all rights related to research ethics are respected.
Type of Study: orginal |
Received: 2021/02/19 | Accepted: 2021/09/8 | Published: 2021/09/14
Received: 2021/02/19 | Accepted: 2021/09/8 | Published: 2021/09/14
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