Abstract:
The objective of this paper is to estimate price and expenditure elasticities of rice, wheat flour and manioc taking into account the endogeneous nature of prices of commodities and the consumers’ income. Data were obtained from the reports published by the Department of Census and Statistics and the Central Bank of Sri Lanka for the period of 1960 to 1986. Finite version of the Rotterdam Model was employed for this purpose and the model was estimated using Zellner’s Iterative Seemingly Unrelated Regression method. The study reveal that the partial expenditure elasticity of rice, wheat flour, and manioc are 1.09,0.25 and o.22 respectively, indicating these commodities as normal food items. Further, it shows that rice is highly responds to change in expenditure or income. Compensated own price elasticities for the same food items are -1.03, -0.38 and -0.80 respectively which suggests that rice is more price responsive compared to others. The cross price elasticities of the same food items indicate that rice and wheat flour are substitutes while manioc is a compliment to both rice and wheat flour. This study demonstrates the importance of the use of the concept of separability and multi-stage budgeting in demand analysis which leads to consider all the commodities as one set or one braneh of the utility tree instead of individual commodities. In fact, development efforts should be focused to uplift income levels of the consumers because above results lead to conclude that the consumers in Sri Lanka are still poor
