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Using Double-Log Imperfect Import Substitutes Model to Estimate Compensated Elasticities and Welfare Impacts

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  • Musyoka, M.P.

Abstract

Decisions on the effects of safeguard mechanisms have been more on theoretical grounds often due to lack of precise estimation of elasticities that can be used to calibrate welfare effects. Alston et.al., (2002) demonstrate that the double logarithmic demand models can be augmented by Slutsky equation to create compensated demand equations which, when estimated result into precise compensates elasticities important for welfare analysis. This study demonstrates a similar adjustment on a dynamic double log Imperfect Import substitutes model to allow for estimation of compensated and uncompensated elasticities. Elasticities from three estimators OLS, SURE and IV indicate that imported wheat, maize and rice are normal commodities in Kenya. The uncompensated elasticities are bigger in magnitude than the compensated elasticities. Focusing on wheat, these compensated elasticities are subsequently used to estimate welfare measures of import tariffs or safeguard mechanisms through the manifested price changes. Results favour a non-tariff wheat importation regime and also favor consumer protection. The study recommends removal of the tariff rate and alternative ways of improving domestic wheat production rather than import restrictions.

Suggested Citation

  • Musyoka, M.P., 2010. "Using Double-Log Imperfect Import Substitutes Model to Estimate Compensated Elasticities and Welfare Impacts," 2010 AAAE Third Conference/AEASA 48th Conference, September 19-23, 2010, Cape Town, South Africa 95774, African Association of Agricultural Economists (AAAE).
    • Handle: RePEc:ags:aaae10:95774
    DOI: 10.22004/ag.econ.95774
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    References listed on IDEAS

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    1. Julian Alston & James Chalfant & Nicholas Piggott, 2002. "Estimating and testing the compensated double-log demand model," Applied Economics, Taylor & Francis Journals, vol. 34(9), pages 1177-1186.
    2. Giancarlo Moschini, 1995. "Units of Measurement and the Stone Index in Demand System Estimation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(1), pages 63-68.
    3. Nusrate Aziz & Nicholas Horsewood, 2008. "Determinants of Aggregate Import Demand of Bangladesh: Cointegration and Error Correction Modelling," International Trade and Finance Association Conference Papers 1114, International Trade and Finance Association.
    4. Dipendra Sinha, 1997. "Determinants of Import Demand in Thailand," International Economic Journal, Taylor & Francis Journals, vol. 11(4), pages 73-873.
    5. LaFrance, Jeffrey T., 1991. "When Is Expenditure "Exogenous" In Separable Demand Models?," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 16(1), pages 1-14, July.
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