Households’ Consumption Response to Food Price Changes in Tanzania

Abstract

Using Household Budget Surveys and applying Deaton’s Approach, this article estimates households’ response to price changes of commodity products in Tanzania from 1900s to 2000s.  Understanding households’’ behavioural response to price changes is critical to answering many questions of public policy in developing countries; in particular, to evaluating the welfare effects of changes in commodity prices.  Following Deaton’s approach, we relate budget shares and unit values to the logarithms of prices, outlay and other relevant household characteristics. The findings suggest that Tanzanians are sensitive and responsive to income and price changes of the commodities they consume, especially of staple foods to which they attach higher weights. All food commodity groups are income- elastic. More than half of commodity groups have own price elasticities greater than one and are statistically significant, implying that most of food commodities  in Tanzania are elastic in demand.  This should not come as a surprise, since, given that the majority of Tanzanians are poor, are therefore very sensitive to price changes.  It was also found that there was substitution and complementary between the commodity groups, but only fifty percent of these cross-price dependencies are statistically significant.  To test for the robustness of within-cluster methodology as proposed by Deaton, the estimates were compared with estimates obtained using actual market prices from forty four districts in Tanzania.