Consumption patterns in Sri Lanka: a decomposition analysis

ABSTRACT

Knowing consumer reaction to changes in prices and income is important in formulating microeconomic policies, such as public utility prices and commodity taxation. This paper analyses the consumption patterns of consumer goods grouped into eight broad commodities in Sri Lanka during the period 1975–2016, using a system-wide framework. The analysis indicates that Sri Lankan consumers allocate more than half of their income to food and nearly four fifths of their income to food, housing, and transport combined. The estimated income and own-price elasticities reveal that food, housing, medical care, and transport are necessities; clothing, durables and recreation are luxuries; and demand for all commodities is price inelastic except for recreation. To investigate the consumption growth pattern, we decomposed the growth in consumption and change in budget shares of the eight commodities into income, relative price, and change in taste. We also simulated per capita consumption expenditure of the eight commodities under various policy scenarios and found that income growth has played a significant role in Sri Lankan consumption patterns.

KEYWORDS:

• Consumer demand
• demand elasticities
• demand theory hypotheses
• decomposition analysis
• simulations

JEL CLASSIFICATION:

• D12
• C10

Acknowledgments

The authors would like to thank the anonymous referees of this journal for their constructive comments and also thank the discussant and participants of the PhD Symposium in Economics 2017, Griffith University, Australia, for their valuable comments on an earlier version of this paper.

Disclosure statement

No potential conflict of interest was reported by the authors.