ON THE ESTIMATION OF DEMAND SYSTEMS WITH LARGE NUMBER OF GOODS: AN APPLICATION TO SOUTH AFRICA HOUSEHOLD FOOD DEMAND

The estimation of large demand systems to investigate the patterns of consumption of households is notoriously difficult. This study develops a modified Almost Ideal Demand System model based on a flexible two-stage budgeting demand modelling framework to examine the effect of estimation procedures (Bottom-up and Top-down) on South African household food consumption parameters. Household food consumption was divided into seven broad food groups: meat and fish; grains; dairy products; fruits; vegetables; other foods. The demand systems were estimated using data from the 1993 South Africa Integrated Household Survey (SIHS) conducted by the South African Labour and Development Research Unit (SALDRU). Empirical results indicate that the Top-down approach is more suited for estimation of South African household food demand. Results indicate that own-price do play an important role in influencing household food consumption. Results also indicate no presence of gross substitution between and within food groups. Expenditure elasticity estimates indicate that meat and fish, dairy products and fruits are luxury products, while grains, vegetables and other foods are necessities in South African household diet.