View of Demand for food products in Finland: A demand system approach

Ilkka P. Laurila

The Research Council forAgriculture and Forestry, theAcademyofFinland,and

theDepartmentofEconomics and Management, the University of Helsinki

ACADEMIC DISSERTATION

To be presented, with the permissionofthe Faculty

ofAgricultureand Forestryofthe Universityof^Helsinki,for^public

criticisminAuditoriumXU, the University,Aleksanterinkatu 5, Helsinki, onOctober 14, 1994,at 12noon.

As this study goes topress, I wishto express my sincere gratitudetoall those who helped mewith this work. I amindebted toDr. Paavo Mäkinen for first suggesting the topic of the studytome.During the initial phase of this study I had the opportunitytoreceive valuable guidance from my teacher, Rector, Professor Risto Ihamuotila, and Acting Professor Petri Ollila. Professor Viljo Ryynänen showed endless interest in my work and provided the necessary facilities atthe Department of Economics and Management, University of Helsin- ki. To Professor Karl Johan Weckman Iowe a particular debt of gratitude for encouraging me in my work during the whole research process. I wish to express my thanks to my colleaguesatthe Department for providing the pleasant atmosphere during these years.

The study was supervised by Acting Professor JukkaKola, Dr. JuhaniRouhiainen, and Professor Karl Johan Weckman, and reviewed by Professor Lauri Kettunen and Professor Arie J. Oskam. I amgreatly indebtedtoall of them for valuable guidance and suggestions.

The study was carried out parallel to the research project “Models and Projections of Demand for Food in the Nordic Countries,” guarded by the Scandinavian Association of Agricultural Scientists. I want to express my sinceregratitude for the fruitful co-operation and stimulating discussions tomy co-researchers Associate ProfessorBengt Assarsson, As- sociate Professor David Edgerton, AndersHummelmose, Associate Professor Kyrre Rickert- sen, and Associate Professor Per Halvor Vale. Special thanksare due toDavid Edgerton for providing mewith the software routines used in the computations, and Anders Hummelmose for collecting the data concerning retail prices in Denmark.

This work wascompleted during my stay as a visiting research fellow^at the Department of Agricultural Economics and Policy of Wageningen Agricultural University, the Nether- lands. I am grateful to Professor Piet C. van den Noort and Professor Arie J. Oskam for providing the congenial surroundings of the Department. I wish tothank Dr. Alison Burrell, Alfons Oude Lansink, Dr. Jack Peerlings, and Dr. Geert Thijssen for their constructive criticism during the final preparation of the thesis.

The research was financed by the Research Council for Agriculture and Forestry, the Academy ofFinland, and, in part, by grants from Kyösti Haataja Foundation of Okobank Group, the Scandinavian Association ofAgricultural Scientists, and August Johannes and Aino Tiura Foundation of Agricultural Research. I acknowledge my debt of gratitude to the institutions for the resources they have awarded me for this study. I thank the Central Statistical Office of Finland and the Research Institute of the Finnish Economy (ETLA) for providing me with the data for the study.

I thank Jaana Kola for checking the Englishtextand Sari Torkko for editorial assistance.

I would also like tothank the editorial board of Agricultural Science in Finland for accepting this study tobe published in their Journal.

I amgrateful to my dear wife Suvi for her support throughout this work. Little Pellervo was amajor contributor of bringing joytoevery-day life. I wish ^to thank my mother-in-law for taking care ofour household during the last stage of this research. In addition, I would liketothank my parentsand godmother for being inspiring examples of minds thatareopen for_new innovations in life.

Wageningen, August 1994 Ilkka P. Laurila

Abstract 321

1 Introduction 322

1.1 ^Background of food demandanalysis inFinland 323

1.2 Objectivesof the study 324

2Foodconsumption inFinlandin 1950-1991 325

2.1 Definition ofcommoditybundles and variables 326

2.2 Data sets 329

2.3 Budgetshares 329

2.4 Volumes and prices 330

3 Demand theoryand empirical analysis 337

3.1 Determinants ofconsumerdemand for food 337

3.2 Systemof choice: preferences and utility maximisation 339

3.3 Duality in derivingademand system 340

3.4 Slutskyconditions for symmetry andnegativity 342

4 Demand systemspecificationand estimation 343

4.1 Completedemand systemsapproach: literature review 343

4.2 Derivation of the Almost Ideal Demand System 346

4.3 Slutskyconditionsonthe AIDS 348

4.4 Extensions of the AIDS 350

4.4.1 Dynamic AIDS 350

4.4.2 Switchingstatic anddynamic^AIDS 352

4.5 Aggregationover consumers 353

4.6 Aggregation overgoods: separabilityand multi-stage budgeting 356

4.7 Specificationof the hierarchic demand system 358

4.8 Elasticities of the AIDS 360

4.9 Estimation methods 363

5 Systemof demand for food products: model selection and evaluation 364 5.1 Selectionofpreferred specifications: testing^parameterrestrictions 364

5.2 Evaluation of thepreferredmodelspecifications 367

5.2,1 Negativitycondition ³⁶⁷

5.2.2 Parameter estimates 367

5.2.3 Goodnessof fit 368

5.2.4 Diagnostic checking 369

6 Elasticityestimates 376

6.1 Within-groupelasticities 376

6.2 Total elasticities 381

6.3 Elasticities compared with elasticities obtained inother studies 384

7 Projections to year2000 390

7.1 Introductoryremarks ³⁹⁰

7.2 Forecastingaccuracy 391

7.3 Projections of exogenous variables 393

7.4 ^Projectedvolumes for2000 396

7.5 Projected budget shares for2000 397

8.2 Food demand system for Finland 400

8.3 Elasticity estimates 402

8.4 Projections to year2000 404

8.5 Conclusionsandpolicy implications 406

Summary 409

References 413

Selostus 419

Appendix I Definition ofcommoditybundles

Appendix2 Food demand system for Finland: parameter estimates Appendix 3 ^Glossary

Demand for food products in Finland: A demand system approach

Ilkka P. Laurila

Laurila, LP. 1994. Demand for food products inFinland: A demand system approach.

Agricultural Science inFinland 3: 315-420. (Department of Economics and Management, ^P.O.

Box27,FIN-00014 UniversityofHelsinki,Finland.)

The study wasconcerned with the estimation of food-demand parameters in ^a system context.

The patterns of foodconsumption inFinland were presented over theperiod 1950-1991,and a complete demand system of food expenditures wasestimated. Price and expenditure elasticities of demandwerederived,and the resultswereused to obtainprojections onfutureconsumption.

While the real expenditureon food has increased,_the budgetshare of food has decreased. In the early 19505,combined Food-at-Home and Food-away-from-Home corresponded toabout 40%of consumers’ total expenditure. In 1991the share was 28%.There was a shift to meals eatenoutside the home. While the budget share ofFood-away-from-Home increased from3% to 7%overthe observationperiod,Food-at-Home fell from 37%to21%,and Food-at-Home exclud- ingAlcoholic Drinks fell from 34%to 16%.

Within Food-at-Home, the budgetshares of the broad aggregate groups, Animalia (food from animal sources), Beverages, and Vegetablia (food from vegetable sources), remained about the same over the four decades, while structural change tookplace within the aggregates. Within Animalia,consumption shifted fromDairy Products (other than Fresh Milk) to Meat and Fish.

Within Beverages, consumptionshifted from FreshMilk and Hot Drinks to Alcoholic Drinks and Soft Drinks. Within Vegetablia, consumption shifted from Flour to Fruits, while the shares of Bread and Cake and Vegetables remained about thesame.

As the complete demand system, the Almost Ideal DemandSystem^(AIDS)wasemployed.The conventional AIDS was extended by developing a dynamic generalisation of the model and allowingforsystematic shiftsinstructuralrelationships overtime.A four-stage budgetingsystem was specified, consisting of sevensub-systems (groups), andcovering 18food categories.Tests onparameter restrictions andmisspecificationtestswereused to choose the mostpreferredmodel specificationfor each group.

Generally, the estimated models did not satisfy the Slutskyconditions. The goodness-of-fit measures were good, and, compared tostatic specifications, dynamics ^usuallyprovidedabetter fit. The misspecificationtestsindicated that thedynamic specification wascorrect, butsomeform ofmisspecificationwasfound. The structuralchange in parameters indicated that the modelling failed to track a^{stablepreferencestructure- ifthere isone.}

The estimated demand system was employed in projecting the future consumption of food products inFinland to the year 2000.Theapproach wasto choose a certain changein the real totalconsumption expenditureand alternative sets of relativeprices for the forecast period.Four different options of price variables were defined. Three of the optionsrelied on the historical price trends recorded in Finland, whereas one option measured the expected consequences of Finland'spossible membership intheEuropean Union.

Apredicted consequence of themembership inthe EuropeanUnion is that the share of food in consumers’ budgetwould decrease. The expecteddecrease is somewhat faster than the decrease that would takeplace iffutureprice developmentswere basedonthe historical trends.IfFinland joins theUnion,thebudget share of Food-at-Home would decrease from 21% in 1991to 18% in 2000, whereas thebudget share of Food-at-Home excluding Alcoholic Drinks would decrease from 16% in 1991to 14% in 2000.

Key words: Almost Ideal Demand System, consumption, expenditure elasticity,food consump- tion,habitpersistence, price elasticity, projections

321

1 Introduction Substantial changes have occurred in consump-

tion patterns in Finland over the past four dec- ades. There has been a marked increase in the proportion of food expendituresspent away from home: the real expenditure on food consumed in restaurantsand cafesmore than quadrupled, while the real expenditure onfood consumed athome doubled. Real incomes have also risen ^- in the early

1950 s ^the

^average consumer spent 40% of his_or her total budget on food and drink, while by the early

1990 s the

proportion had declinedto 28%.

Within food budget, processed meat products, cheese, fruits, soft drinks, and alcoholic drinks have become increasingly important, whileflour, milk, ^butter, eggs, and coffee have lost impor- tance.Flistory shows large shifts in the consump- tionstructure.For example, expenditures on car- casemeat and soft drinks increased rapidly in the late

1960 s and

early 19705. In both cases, the increase coincided with a decrease in respective real prices. Some of the trends thatwere visible in thepast were cut off in the early 19905. For example, the downturn in consumption of alco- holic drinks coincided with the downturn in the economy.

The objective of thepresentstudy is toexplain the changes in food consumption patterns in Fin- land. In ordertodothat, the determinants of food demand will be identified and quantified. By knowing the past, future developments can be projected. After predicting exogenous ^variables, such astotal expenditure, population, and prices, projections of food consumptionpatterns will be derived.

The study focuses on consumer demand, which refers to the demand given rise by individuals and households. Roughly speaking, it refers to all non-public demand in the economy. The con- ceptdemandstructure ordemandsystem orsim- ply demand is _a function that refers to the _re- sponses ofa consumer to various economic and relatedfactors, such_aslevels and changes in prices andincome, that produce the observable consump- tion behaviourorconsumption. The aggregate de- mand structure or market demand refers to the combined consumption responses of all consum- ers in the economy ^tothe factors that determine the levels and changes in per capita consumption (Haidacher 1992, Johnson ^et al. 1986). When the distinction between the micro- and macro- level phenomena is not essential, the behaviour

of both an individual and all consumers will be called demand.

1.1 Background of food demandanalysis in Finland

Economic analysis of food demand in Finland is well-founded. Three traditionscanbe namedac- cordingtothe data employed: studies using house- hold budget data,studies using National Accounts data, and studies using disappearance dataatthe nationallevel, often referred to as the Food Bal- anceSheets. Kaarlehto (1961) pioneered in us- ing the household budget data in orderto esti- mate income elasticities for food commodities. A special interest was on how food expenditures dependonincome levels. Marjomaa(1969) start- ed a series of studies employing the aggregate level National Accountsdata, which became avail- able from the year 1948 (lateron,Laurila (1985,

1987)derived the series backwards). Insomestud- ies the annual time-serieswere accompanied by household budget data, which have been collect- ed _at intervals of about five years since 1949

(

e.g.

^Marjomaa 1969, Hämäläinen 1973). In ad- ditiontofood items, the studies covered all _pat- terns of households’ expenditures. Hämäläinen (1973) was the first to introduce forecasts for a wide range of food commodities. ^Haggrén and Kettunen ⁽¹⁹⁷⁶⁾ and Kettunen (1976) pub- lished the first forecasts for food commodities using the Food Balance Sheets, the annual series of which became available from the year 1950.

Rouhiainen (1979) estimated demand elasticities and derived forecasts by using the Food Balance

Sheets. In additiontothe mentionedstudies, which covered _awide range of food commodities, there were several studies that covered_one commodi- ty or a small number of commodities (Kaar-

lehto 1959, Sandelin 1959, Koivisto and Ko-

ponen 1961

a,

b, Koivisto and ^Naapuri 1961,

Koponen 1961, 1964,^Nyberg 1967, Kettunen 1968).

Household budget dataarecross-sectionaldata, whereas the National Accounts and the Food Bal- anceSheetsaretime-series data. Household budg-

et dataare micro-data, where observations con- sist of records of individualhouseholds, whereas the othertwodata setsrecord consumptionat the aggregate level. Household budget data usually offer substantial variation in expenditure levels and limited variation in relative prices (unless there are several cross-sections). Thus, the data set has an advantage in estimating expenditure responses. Studies which use household budget data benefit from alarge number ofobservations, but have several disadvantages, suchas the prob- lem of zero-purchases^(i.e. all households do^not consume all the analysed categories). Empirical demand analysis basedon household budget data has traditionally focused ondemographic effects and expenditure effects, and has ignored price effects (Pollak and Wales 1992, p. 66-67).

Time-series data usually offer substantially more variation in relative prices and less variation in expenditure. Thus, they havean advantage ines- timating cross-price effects.

By using micro-data, it is difficult to derive direct implications atthe macro level. If interest is on macro-level market demand and, for in- stance, on (pre-)evaluation of policy instruments, micro-level responses donot offer the necessary information. In thepresent study, the interest is onmacro-level market demand. Studies thatem- ploy macro-level disappearance data (the Food Balance Sheets) have the advantage that only by means of that data set one can study consump- tion in termsof physical quantities.However, the approach suffers from the fact that the price and volume series _come from different sources. The price series can be derived by usingrepresenta- tive goods. However, the derivation of consump- tion expenditures essentialtoasystem-wide anal- ysis with allocation models, which dominate the modern methodology, would be rather artificial.

Moreover, by measuring the consumption interms of kilograms rather than in monetary terms, for instance, the increase in the consumption of proc- essed products is easily ignored.

The present study joins the tradition thatem- ploys the National Accounts data. Since the pio- neering study by ^Marjomaa(1969), anumber of

studies have been published. Hämäläinen (1973) 323

showed that Engel’s law ^- that the budget share of food decreasesas incomes increase ^- was evi- dent in Finland.

1

Väisänen (1980) updated the description and forecasts. Virén (1983) was the first to use a system-wide approach. He estimat- ed the price and income elasticities by using an extended Linear Expenditure System. The series of studieswas continued by Rahiala (1984) and Mankinen (1988). In addition to the cited stud- ies, a contributionwas made concerning histori- cal consumption: Laurila (1985, ¹⁹⁸⁷⁾present- ed a pioneer work on private consumption over the period 1880-1980. Mellin(l9B3, 1985)com- pared static and dynamic properties of the con-

sumption expenditures in Finland.

The referred contributions have increased the understanding of the factors and relationships af- fecting food demand. However, recent develop- ments in demand models provide newpossibili- ties for empirical analysis. For example, models thatare more consistent with theconsumer theo- ry have been developed (flexible functional forms). In addition to this, a great number of diagnostic testsand evaluation criteria areavail- able for testing the model performance. A gener- al feature with very few exceptions is that the former studies employed only the single equation methodology. There are several reasons why one should adopt a system-wide approach, which is nowadays_a standard in demand analysis. Anem- pirical demandsystem, in which interproduct de- pendencies areestimated inasimultaneous frame- work, gives information about the complete in- terdependentnature of food choice, which is ^not explored by single equation analysis.

1^{ErnstEngelobservedin}the mid-19th century that the poorera familywas, the greaterproportion of total expen- ditures wasallocated to food, which may be restated that, as consumerincomesincrease, the proportion of income spentonfood decreases,ceterisparibus. Engel’s observa- tion isoneof the few patterns that has been observed with sufficient persistence to be called a law of economics (Senauer et al. 1991,p. 134-136). Interms of elastici- ties, Engel’slaw states that food is income inelastic. The effect of income ^ontheexpenditurepatterns, ortheEngel function, has been one of the most extensively studied empirical relationships ineconomics.

1.2 Objectives ^ofthe study

Because of the budget constraint, increased con- sumption ofone food itemcan occuronly at the expense of another. As a result, food itemscom- pete with eachother, and it is importanttostudy intergroup and interproductrelations, substitutes and complements. Although the interest is in food demand, the interdependence in demand between food items and other commodities makes itrea- sonabletoestimatea complete demandstructure or system. The completesystem approach allows the estimation of cross-commodity substitutions, which _areessential in the demand theory.

Food demand is an interesting subject from various points of view. Applying a demand sys- tem on food is interesting as a methodological matter.The foodsystem altogether^- linking farm- ers and consumers by producing, transporting, storing, and processing agricultural commodities into food products and services^- is dependenton consumption and, thus, information on demand structureand factors affecting it is essential. Man- ufacturers, retailers, and nutritionists are inter- ested in consumption trends. Farmers are inter- ested in consumer-oriented production and mar- keting.

The estimated models and elasticities will be used for structural analysis, which examines the causesfor the changes in consumption patterns.

Elasticities _areimportant in the design and oper- ation of policy and regulatory schemes. Together with some other elements (such as supply, for- eign trade, environmental measures,and taxes), the demand for food is acentral issue in making agricultural and food policy. For example,^tosome degree, farmers’ income depends on the market demand for food products. Nutritional policy af- fects consumption by recommending to diminish or increase the consumption of certain products.

Many policies that are notintendedto affect the market may have indirect influenceonfood con- sumptionpatterns. To be able^to evaluate the ef- fects of various policy instruments, responses to income and price changes are of central impor- tance. Government policy-makers and regulators areinterested in changes in consumption in order

to adjust production control. Demand analysis pro- duces information which is needed when govern- mentsaim atintervening in the markets toachieve certain goals, for example,toincreaseordecrease the consumption ofacertain item. The anticipat- ed efficiency of the programmecanbe pre-evalu- ated.

In addition to the knowledge of the current structure of food consumption, strategic foodsec- tor planning often requires forecasts on future food demand. The estimated models will be used to forecast food expenditures to the year 2000.

The sensitivity of these forecasts to alternative options of price developments will be examined.

The objectives of thepresent studyare:

I. To present the food consumption ^patterns in Finlandover the period 1950-1991.

2. To estimateademandsystemfor_a 18-catego- ry breakdown of food expenditures.

3. To verify how well the Finnishconsumerbe- haviour correspondstothe_consumer theory.

4. To estimate price and expenditure elasticities of food commodities.

5. To obtain projections onfuture food demand in Finland.

6. To examine the sensitivity of the projections toalternative price developments.

7. To derive policy implications.

The description of food consumption is proba- bly interestingtoanyone who likestoknow about Finland’s social and economic history. Demand- systemestimationas amethodological matterin-

terestsresearchers, teachers, and students in eco- nomics. The derived elasticities and projections areuseful for policy-makers aswell _asplayers in the food system.

The study is organised as follows. Chapter2 defines the datasources,variables, and commod- ity bundles. It also explores the long-term devel- opments of food consumption and food prices in Finland. Chapter 3concerns the basic theoretical elements of the demand analysis. The discussion should facilitate the understanding of the nature and conditions the theorystatesfor empirical anal- ysis. Chapter4 describes the methodology of the empirical analysis, and complete demandsystems approach is presented. The formulation of the functional formstartsfrom a static specification, then, dynamic behaviour is incorporatedand, fi- nally, variables allowing for structural change in consumerdemandareintroduced. The hierarchic demand_system is specified. Chapter 5 describes the selection and evaluation of preferred model specifications. Chapter 6 provides the estimated price and expenditure elasticities. The elasticities are compared with elasticities obtained in other studies. Chapter7 concerns consumption projec- tions. The estimated modelsare used for simula- tions,both for evaluating the model performance over the sample period, and for projecting food expenditures to the year 2000. In Chapter 8, the results of the present study are discussed, and they _are compared with the results obtained in other studies. The implications for future research and the suggestions for data revision areprovid- ed. Finally, concluding remarksarepresented.

2 Food consumption in Finland in 1950-1991

Over the last fourdecades, the final consumption expenditure has correspondedtoabout three-quar- ters of the gross domestic product in Finland.

Most of that has been the total private consump- tion. In the 19505, the total private consumption expenditure was an average of 63% of the gross

domestic product. The public sectorand also pri- vate non-profit bodies have increased their ex- penditure overthe years,so that in the

1980 s ^the

proportion of the total private consumption was 51%. In 1990 the proportion was 49%. Because in 1991 private consumption still increased, while 325

Table I. Consumption inFinnish economy in 1950-1991.“

Category ^%(grossdomesticproduct incurrentprices, FIM ^million)

1950-59 1960-69 1970-79 1980-89 1990 1991

average average average average

Grossdomesticproduct 10,139 26,373 98,108 326,740 525,900 503,645

of^{which, %}

Grossfixedcapitalforma-

tion and netimports 24 25 27 27 27 21

Finalconsumption 76 75 73 73 73 79

of^{which, %}

Publicconsumption 15 19 23 27 29 30

Privateconsumption⁶ 85 81 77 73 71 70

of^{which, %}

Non-profitbodies' 2 4 4 4 6 6

Total Private Consumption⁰ 98 96 96 96 94 94

of^{which, %}

Durables 6 8 10 12 11 9

Semi-Durables 19 15 14 13 13 13

PrivateConsumption 75 77 76 75 76 78

of^{which, %}

Services 29 36 38 40 44 45

Non-Durables 19 19 20 20 19 19

Food 52 46 43 40 37 36

of^{which, %}

Food-away-from-Home 8 10 17 21 26 26

Food-at-Home 92 90 83 79 74 74

Sources:^Hjerppe(1989), Bulletin of Statistics (1986:1, 1989:1, 1993:1), National Accounts.

“A guide to compute, for example, the expenditure on Food-at-Home in the 19505: FIM 10,139 mi11i0n*.76*.85*.98*.75*.52*.92.

lion*.76*.85*.98*.75*.52*.92. The outcome correspondswith theFIM 2,312million which is the actual value of the consumption. The figures have been rounded to the nearest final digit. Thus, there may de an apparent slight discrepancy between the actual values and the values derivedasguided.

bConsumptionof privateand non-profitbodies. Non-profitbodiesarehousing corporations,etc.

cConsumptionofnon-profit bodies,and net value of directpurchasesabroad.

dFinal consumption expenditureof households in the domestic market.

the gross domestic product and investments dropped, total private consumption covered 52%

of the gross domestic product.

Aboutone-quarterof the total private expendi- ture has been classified as the consumption of durables and semi-durables, therest is the bundle that is under consideration in the present study.

This bundle, private consumption excluding du- rables and semi-durables, accounted for 47% of the gross domestic product in the 19505. The share gradually declined toan average of 38% in the 1980

s,

and _was 37% in 1990. In 1991 the share

under considerationrose to41^%,due _toincreased private consumption and decreased gross domes- tic product, investments, and purchases of dura- bles (Table 1).

2.1 Definition ofcommodity bundles and variables

The demand _system approach adopted in the present study allocates the total expenditure into smaller segments. In afew cases the “total” re-

fers to the total private consumption (including durables and semi-durables) which covers the fi- nal consumption expenditure of households in the domestic market._However, in _mostcasesthe “to- tal” refers to private consumption whichcovers the final consumption expenditure of households in the domestic market excluding durables and semi-durables. The approach follows Alessie and

Kapteyn’s(1991) application of the AIDS. They removed durable _components from the expendi- ture categoriestoavoid complications dueto the investment _nature of durables. By removing du- rables, it is implicitly assumed that the house- holds’ utility function is weakly separable in du- rables and non-durables (Alessie and ^Kapteyn

1991, p. 412).

The consumptionstructure in Finland is studied bymeansof time-seriesonexpenditure and prices.

Altogether 28 groups of commodities are defined (Table 2,adetailed description of the categories is in Appendix 1).Hereafter, capital initials_are used when referring tothe defined categories.

The following variablesareconsidered:

Quantity, orconsumption volume, orreal ex- penditure of good i_atperiod_t(q.) is measured_as the per capita consumption in Finnish Markkaa (FIM) in prices of the year 1985. Since the data operate at the aggregate level, the implied con- sumption has tobe interpreted with caution. The figures refer _to the national averages, and there probably exists considerable variation in the be- haviour between individuals. In order to obtain per capita figures, meanpopulation of each re-

spective year is used asthe measure of the popu- lation size. To make the description consistent, mean population is used as the measure also in Alcoholic Drinks, despite the fact that alcohol is mainly consumed by adults.

Budget share, or expenditure share of good i atperiod t (w ⁾ is defined as the value of pur- chases ofa commodity group compared with the

aggregate:

=

p_i'q_‘>

=

Mi'

"

v

⁽¹⁾

i=1

where p is the price of good i, x is the total expenditure, and n is the number of goods in the system. Various definitions of xare used. In this chapter, either Total Private Consumption or,al- ternatively, the expenditure on Food-at-Home is used asthe aggregate.In later chapters, also sub- groups of Food-at-Homeare employed.

Relative price^, orprice ratio of good iatperi- od t (pJ) is computed as follows. The data set contains two vectors for each good, qjt and c.(,

which is the per capita consumption of good i in currentvalues (FIM) atperiod ^t.The transforma- tion from current to real values has been carried out by the Central Statistical Office by using a consumerprice index [of Laspeyres type] for good i. A derived price index [of Paasche type],²orthe implicit price index of good i(p.) is measured by dividing the value of purchases in current terms by the value of purchases in fixed 1985 terms (ic.Jq^,().To obtainpj, the implicit price index is deflated by the implicit price index of the aggre- gate, or

r

= Pi< = Cit^/(lit =

c,/g,7

p ^{n n n}

'

I ^‘,/1

^*„

^vS

^*„

I=l i=i i=i

In thepresent chapter, n refers to all thecate- gories that areincluded in Private Consumption.

Thus, P roughly indicates the general price lev- el. In the econometric analysis, n refers to the categories that are included in the group under examination. Consequently, P_t indicates the price level of that particular group.

2TheLaspeyres priceindex isaratio of incomes need- ed in different years to purchase year I bundle. More exactly, it shows the ratio between the income needed to buy the year 1bundle at year2 prices and the actual year 1income. BycomparingtheLaspeyres index (or, alterna- tively, the Paasche index) to the ratio of his orher actual income in the two years, a consumer can measure the change in his or her welfare over the two years. The Paascheprice index isaratio of incomes neededindiffer- ent years topurchase year2bundle. Moreexactly,it shows the ratio between the income needed to buy the year 2 bundle at year 2 prices and the income needed to have purchased the same year2bundle at year 1 prices ^(e.g.

Calland Holahan 1983,p. 102-109).

327

Table2. Definition of the commodity bundles.

Category Composition (budget shares,^%,in 1991 inparentheses)

Categorynumber and mutualdependency Total Private

Consumption (including Durables andSemi-Durables) PrivateConsumption

Food-at-Home

-Animalia (food from animal sources)

- Meat and Fish

- Meat Products

- Carcase Meat

- Fish

- DairyProducts (other than Fresh Milk)

- Cheese

- SourMilkand Cream

- Butter

- Margarine

- Eggs

-Beverages

- Alcoholic Drinks

-Fresh Milk

- SoftDrinks

- Hot Drinks

-Groceries

-Vegetablia (food from vegetable sources)

-Bread and Cake

-Fruits

- Vegetables

-Flour

Food-away-from-Home Non-Durables

Services

PrivateConsumption(78%), Semi- Durables (13%), Durables (9%)

Food-at-Home (27%),Food-away-from- Home(9%), Non-Durables(19%), Services (45%)

Animalia (34%),Beverages ^(32%), Vegetablia(26%), Groceries (9%).

Meat and Fish (64%),DairyProducts (33%), Eggs^(4%).

Meat Products (53%), Carcase Meat (36%), Fish (10%)

Sausages(56%), etc.

Beef and veal (59%), pork (22%), poultry (12%), etc.

Unprocessedfish (69%), etc.

Cheese (40%), SourMilkand Cream (31^%), Butter (17%),Margarine^(12%)

Emmentaler and edam (51%), etc.

Sourmilkproducts ^(64%), cream(36%) Dairybutter,etc.

Margarine(90%),oils(10%) Eggs

Alcoholic Drinks (68%), Fresh Milk^(16%), SoftDrinks (9%), Hot Drinks (8%) Beverageswhich contain alcohol Standardmilk,low fatmilk,etc.

Softdrinks and mineral waters

Coffee (89%), tea (5%),cocoa(4%), etc.

Candiesand chocolate (36%), ice-cream (17%), sugar (15%), etc.

Bread and Cake (41%), Fruits (28%), Vegetables(19%), Flour (13%) Coffeecake (52%), bread (48%) Cultivatedfruits and berries (58%), etc.

Vegetablesand potatoes

Flour and hulled grain (68%), etc.

Food and drinkinrestaurantsand cafes, food catered atplacesof work Non-durablesexcludingFood-at-Home Services excluding Food-away-from-Home

0

=l+2+3+4 1

= 1.1⁺ 1.2+ 1.3+1.4 1.1

= 1.1.1⁺ 1.1.2+ 1.1.3 1.1.1

= 1.1.1.1⁺ 1.1.1.2+ 1.1.1.3 1.1.1.1

1.1.1.2 1.1,1.3 1.1.2

= 1.1.2.1⁺ 1.1.2.2

+ 1.1.2.3⁺ 1.1.2.4 1.1.2.1

1.1.2.2 1.1.2.3 1.1.2.4 1.1.3 1.2

=1.2.1⁺ 1.2.2+ 1.2.3+1.2.4 1.2.1

1.2.2 1.2.3 1.2.4 1.3 1.4

=1.4.1⁺ 1.4.2⁺ 1.4.3⁺ 1.4.4 1.4.1

1.4.2 1.4.3 1.4.4 2 3 4

In line with the interpretation of the relative price, if it is stated that_a certain commodity has become cheaper, this must not imply that the nominal pric- es have gone down,but it is ratheran outcomeof

the phenomenon where the price of the commodity increased less than the general price level.Thus, if aprice changes by the^rateof the general^inflation, the relative price hasnotchanged.

2.2 Data sets

The annual data consist of expenditure series of goods and services for household consumption supplied in both current and constant monetary forms. The National Accounts time series for 1970-1991 were obtained from the Central Sta- tistical Office. Because the volume series based on the year 1985areavailable only from 1975,to make the older values agree with the values after the year 1974, a level adjustment for the years 1970-1974 was made. The data that cover the years 1960-1969 were partly obtained from the Research Institute of the Finnish Economy, part- ly they were built up by the author by means of the data presented in Laurila (1985). Data cov- ering years 1950-1959were built up by the au- thor utilising the series presented in Laurila (1985), To make these values agree with thepost- -1960 values, a level adjustmentwas made. As a result, the base year for all the series _was 1985.

The data covering 1950-1991 were used to de- scribe the development of consumption patterns, whereas the econometric analysis employed the data covering 1960-1991. The reasons for not using the data from the

1950 s in

the econometric analysis are as follows: (a) a number series are available only from 1960;(b) most of thepost- -1960 values are derived from a uniform data source which is different from the data ^source utilised when deriving the pre- 1960values; and (c)consumerpreferences tend tochangeover time, and, consequently, the observation period must not covertoo long time period, because most of the econometric methods implicitly assume con- stantconsumerpreferences.

The National Accounts values refer to market values. The data are prepared according to the United Nations conventions. The data of the present study follow the ‘new’ Systems of Na- tional Accounts (United Nations 1968). For fur- ther discussion _on the consumption in the Na- tionalAccounts, see Hämäläinen (1973), Söder (1984),Laurila (1985,Ch.A).

Implicit price series were derived by dividing

current monetary expenditures by constant ones.

The expenditure serieswere transformed toper

capita expenditures. For diagnostic checking, data on disposable incomes were needed. The series of population and disposable income were taken from official statistics (Statistical Office 1992, Bulletin of Statistics).

It is noteworthy that the consumption interms of expenditure is different from the consumption interms of physical units. For example, the Food Balance Sheets by OECD and FAO measure the consumptionas araw-material disappearance, and in some commodities, as physical quantities of processed products. The Food Balance Sheets mostly ignore the changes in quality and the de- gree ofpreparation. In the_case offood,^changes

in quality, rather than changes in quantity meas- uredas raw materials,explain much of the changes in expenditures allocated to individual bundles.

For example,percapita real expenditure _onFood- at-Home excluding Alcoholic Drinks increased by 78% from 1950 to 1991, while the average intake of energy, excluding AlcoholicDrinks, ^de- creased from 2990 kcal per day in 1950 to2770 kcal per day in 1991, or7% (Rouhiainen 1979, MTTL 1992). The apparent contradictions be- tween the volume trends in terms of monetary and physical units (Laurila 1990) can be ex- plained by the fact that food has become more prepared before it reaches the consumer. More has been spent per energy unit. Therefore, the consumption in terms of value may be increasing parallel to adecrease in the consumption interms of weight. The added value originates mainly from services: the purchased good is further prepared than it used tobe. Often thereare several goods in_onebundle. If those goods thatare moreproc- essed increase their share in a bundle, the real expenditure of the bundle increases, although no quality changes have taken place in individual goods.

2.3 Budget shares

Although food expenditures have increasedover decades, the share of food in the total expendi-

ture has declined gradually. In the early 19505, combined Food-at-Home and Food-away-from-

329

Home corresponded to some 40% of consumers’

expenditure. In 1991 the share was 28% (for a historical perspective over 100 years, seeLauri-

la 1987). There has been a shiftto meals eaten outside the home. While the budget share of Food- away-from-Home increased from 3% ^to7% over the observation period, Food-at-Home fell from 37% ^to 21%. Also Food-at-Home excluding Al- coholic Drinks was studied. That is because alco- hol is specially treated in the Finnishtax-system, making it an artificially expensive commodity.

Probably because good substitutes are lacking, alcohol is abig factor in households’ budget. In 1991 the budget share of Food-at-Home exclud- ing Alcoholic Drinks was 16% (Figure 1).

The data show that the budget shares of Cheese, Meat Products, Alcoholic Drinks, Soft Drinks, and Fruits have increased strongly over the observation period. The budget shares of Butter, Eggs, Fresh Milk, HotDrinks, and Flour have decreased themost.A continuing shift from Carcase Meatto Meat Products has been record- ed. The budget shares of the broad aggregate groups,Animalia,Beverages, and Vegetablia have remained quite steady over the observation peri- od. Until the 19705, the consumption of Vege- tablia decreased in proportion to the consump-

lion of Animalia. After that the trend disappeared (Table 3).

When studying the budget shares, it should be noted that a change in a share is aresult of_two components: change in the relative price and change in the relative volume. For example, the dramatic decrease in the budget share of Hot Drinks is,fromone dimension, a consequence of a300% increase in the consumption volumeand, from anotherdimension, a consequence ofan al- most90% decrease in the relative price.

2.4 Volumes and prices

Although the share of food in the total expendi- ture has decreased, food expenditures have in- creased _over the observation period. On the per capita basis, Total Private Consumption (includ- ing Durables and Semi-Durables) became 3.4- fold in four decades, while Food-at-Home dou- bled, and Food-at-Home excluding Alcoholic Drinks grew just 78%. Over the observation peri- od, Total Private Consumptionincreased, on an average, by 3.1% annually, while expenditure on Food-at-Home and Food-away-from-Home in- creased by 1.7% and 3.8%, respectively. Food-

Fig. I.Food expenditures related to Total Private Consumption (including Durables and Semi-Dura bles)in 1950-1991.Note: Combined food consists of Food-at-Home andFood-away-from-Home.

331

Share ofFood-at-Home, ^%

1950-59 1960-69 1970-79 1980-89 1990 1991

average average average average

Food-at-Home 100 100 100 100 100 100

-Animalia 33.7 36.9 36.6 35.2 34.1 33.5

-Meat and Fish 18.1 20.4 22.6 21.6 21.7 21.3

- Meat Products 5.6 9.5 11.0 11.1 11.5 11.4

-Carcase Meat 9.8 8.5 9.0 8.1 8.1 7.8

-Fish 2.7 2.4 2.6 2.4 2.1 2.2

- Dairy Products 13.2 14.4 12.2 12.0 11.0 11.0

-Cheese 1.5 1.9 2.4 3.4 4.1 4.4

- SourMilkand Cream n.a.“ 3.0 3.7 3.4 3.4 3.4

-Butter 11.8^b 7.5 4.2 3.7 2.1 1.9

-Margarine n.a.^b 2.1 ^1,9 1.5 1.4 1.3

-Eggs 2.3 2.1 1.7 1.6 1.3 1.2

-Beverages 32.0 30.6 32.6 29.9 31.4 31.9

-Alcoholic Drinks 8.2 10.6 16.0 17.2 20.9 21.6

-FreshMilk 14.3“ 11.5 8.4 6.1 5.2 5.1

-SoftDrinks 1.0 1.3 2.0 2.3 2.7 2.7

-Hot Drinks 8.5 7.1 6.2 4.2 2.7 2.5

-Groceries 9.5 8.7 9.0 9.2 9.2 9.1

-Vegetablia 24.8 23.8 21.9 25.7 25.4 25.5

- Bread and Cake 8.1 10.2 9.3 10.1 10.4 10.4

-Fruits 4.7 4.8 5.9 7.1 7.0 7.1

-Vegetables 4.5 3.7 4.0 5.3 4.8 4.8

-Flour 7.5 5.1 2.7 3.1 3.2 3.2

Source:NationalAccounts;n.a.:notavailable

“Fresh Milkand SourMilkand Cream cannot be separated.The combination isreported,

hFats cannot beseparated.The combination isreported.

at-Home excluding Alcoholic Drinks has been evenslower togrow: 1.5% annually overthe ob- servation period (Table 4).

The growthrates fluctuated_{a great}deal_overthe observation period. In 1991 the consumption of Food-away-from-Home fell strongly for the third time over the observation period. The falls have been associated with falls in Total Private Con- sumption. A fall in Total Private Consumption has been realised as a stronger fall in Food-away- from-Home, indicating an expenditure-elastic de- mand. The demand has also been elastic during the economic booms of 1951, 1955, the late 19605, and the 1980

s.

Expenditure on Food-at-Home has followed the changes in Total Private Consump- tion much moreclosely (Figure 2).

The consumption of Food-at-Home doubled in four decades. The highest volume wasrecorded in 1989. In both years 1990 and 1991, the con- sumption declined by 3%. Relatedtothe general price level,Food-at-Home became 24% cheaper over the observation period (Figure ^3). In 1991, an average Finn consumed at home worth FIM 10,800 of food (in current values). This corre- sponded toFIM 900 per^month,

The volume of Food-away-from-Home in- creased most of the time until 1990, with short drawbacks in the 1950

s

and late 19705. The vol- ume rose by 370% from 1950to 1989, and by 250% from 1960_to 1989. The consumption _stag-

nated in 1990, and fell by 8% in 1991. The con- sumption ofFood-away-from-Home becamemore

Table4.Growthinthe consumption volume from 1950to1991.

Per capita real expenditure, change fromprevious ^year,% Change

1951-59 1960-69 1970-79 1980-89 1951-91 ^l°

average average average average average

Total PrivateConsumption (including Durables and

Semi-Durables) 3.0 4.3 3.2 2.9 3.1 237

PrivateConsumption (excludingDurables and

Semi-Durables) 2.8 3.7 3.0 2.4 2.8 209

CombinedFood-at-Home and

Food-away-from-Home 1.7 3.4 2.4 1.7 2.1 127

Food-at-Home 1.5 3.1 2.1 1.1 1.7 100

Food-at-Homeexcluding

Alcoholic Drinks 1.6 2,4 1,9 0.8 1.5 78

Food-away-from-Home 2.9 5.6 4.3 3.8 3.8 333

Source:National Accounts

expensive overthe decades. The price in 1991 was 85% higher than the all-time-low in 1952 (Figure 3).In 1991,anaverageFinn consumedawayfrom home worth FIM 3,800 of food (in current val- ues).This corresponded toFIM 320 per month.

Meat and Fish

Meat and Fish together corresponded ^{to 18.1%}

of Food-at-Home in the 19505. The sharerose ^to 22.6% in the ^19705, then decreased to21.6% in

Fig. 2. Growth rates ofFood-at-Home, Food-away-from-Home, and Total Private Consumption^(in- cluding Durables and Semi-Durables) in 1951-1991:change inper capita real expenditure from previousyear.