Liquidity Constraint and the Demand for Food: Income Elasticity of Calorie in Rural Ethiopia
In this study we attempt to add to the empirical literature by estimating the income elasticity of calorie intake for rural Ethiopia. We have extend the existing literature in two directions. First, using data collected from rural Ethiopia during 1994-95, efforts were made to separate the effects of permanent and transitory income on calorie consumption. Second, on the grounds that income elasticity of calorie consumption differs between those who can smooth their consumption and those who can not do so due to inability to borrow against future income, we considered these two groups explicitly. The results revealed that the calorie elasticity with respect to income (permanent, transitory and total) is consistently higher for credit constrained households. Specifically the elasticity with respect to permanent income ranges from 90 percent for constrained to 42 percent for constrained households, depending on the source of income and estimation procedure. Not surprisingly, the elasticity with respect to both permanent and transitory incomes is not different from zero for non constrained households. For the constrained households, calorie consumption responds to even transitory income, though the figure is less than the corresponding figure for permanent income. Apparently, differentiating households in terms of their ability to smooth consumption, and decomposing observed income into permanent and otherwise partly explains why the evidence on the estimates of the income elasticity of calorie intake are so diverse.
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