Abstract:
In recent times, Pakistan has been facing increasingly higher rates of inflation due
to economic instability and domestic uncertainty. Since the entire economy is made of
individual households, understanding household consumption behavior is important for
evidence based policy interventions in Pakistan. The purpose of this study is to understand
how households in Pakistan alter their overall consumption behavior and, specifically,
durable consumption spending based on the prevailing inflation rates. For this purpose,
Household Integrated Economic Survey (HIES) data from three rounds, 2010-11, 2015-16,
and 2018-19, was pooled, budget shares were calculated, and Quadratic Almost Ideal
Demand Systems (QUAIDS) at two stages of budgeting were estimated. The results
showed that over time, expenditure shares on food have decreased while they have
increased on nondurables indicating an improving standard of living in Pakistan. Durable
goods are the only commodity group significantly affected by inflation, however, the effect
is negative. A higher rate of inflation seems to be associated with a lower budget share of
durables. The demand elasticities of the first stage of budgeting showed that food is a
necessity, while nondurable goods and durable goods are both luxuries with elasticities
greater than 1. Cross-price elasticities showed that food and nondurables are asymmetric
complements and substitutes. In the second stage of budgeting, the demand elasticities
indicated that all three subgroups of durables are unitary elastic indicating that all three
subgroups are equally important. Cross-price elasticities showed that Kitchenware and
Electronics are complements, while Furniture is a substitute for Electronics.
