Journal of Contemporary Management Sciences
Volume 1 (1) 66-71
JCMS Publication, 2014
Journal of
Contemporary
Management
Sciences
LAIDS Model Analysis of Demand System for Thai Agricultural
Export Products to China
Kesinee Muenthaisong
[email protected]
Eakapoom Wongsahai
[email protected]
Teeraporn Leemanonwarachai
[email protected]
Abstract
The objective of this research is to analyze the demand for exporting agricultural products from Thailand to China.
There were five main agricultural products with the highest export value including in this research; rice, rubber,
cassava, sugar, and fresh durian. Regression analysis with seemingly unrelated regression estimation was applied for
analyzing linear almost ideal demand system (LAIDS) model. The results indicated that agricultural export products
from Thailand appeared as both compliment and substitute commodities. In addition, the results also present that
rice, cassava and rubber are luxury product, while sugar and fresh durian are inferior goods.
Keywords: Demand Equation, Linear Almost Ideal Demand System, Agricultural Products, Thailand
1. Introduction
The development of Thai economy has been hugely relied on export, evidently with the export value of
5,195,596.73million Baht in 2009, which represented 49.28% of national Gross Domestic Product (GDP). It has
continuously increased to 7,082,490.86 million Baht in 2012, which was accounted for 62.26% of the country’s
GDP. The major export sectors are manufacturing sector and agricultural sector, respectively. However, this paper
focuses on the agricultural sector. The main exporting destination market since 2010 is China. In 2012, the export
amount was 829,848.16 million Baht, representing 11.71% of annual value of export (Department of International
Trade Promotion, 2013).
In 2012, main Thai agricultural products exported to China are rice, rubber, cassava, sugar, and fresh durian. They
were accounted for total exports to China as 21.5%, 11.2%, 10.7%, 6.8% and 5.8%, respectively. For such reasons,
the study of export demand of Thai agricultural items, particularly trade partner like China, will create the better
understanding of how sensitive or price elasticity Chinese customers are towards Thai agriculture items in Chinese
market so that business and government agents can arrive with decent pricing, business strategy and trading policy.
The Almost Ideal Demand System (AIDS) was developed by Deaton and Muellbauer (1980) to explain the demand
analysis by taking Stone’s Price Index into the non-linear model to apply demand analysis.The study used data
annual postwar British data from 1954 to 1974 on eight consumers’ behavior. Deaton and Muellbauer (1980)
suggested that influences other than current prices and current expenditures, such as stock effects or errors in price
perception, should be added to the static model to provide better explanation on demand analysis.As a consequent,
the Linearized Almost Ideal Demand System (LAIDS) has become very popular among researchers to apply the
model in explaining different circumstances. Blanciforti, Green and King (1986) studied the LAID model by
estimating a demand system for US consumer expenditure of eleven commodity groups during postwar period, from
1948 to 1978. Buse (1994) found that the evaluation of the standard Seemingly Unrelated Regressions (SUR)
estimator and the standard instrumental variable (IV) framework cannot be constructed with consistent IV estimator.
Moreover, his work corrected errors of inconsistency and inelasticity in the work of Grren and Alston done in 1990
and 1991. P.R. Taljaard, A.G. Alemu and H.D. van Schalkwyk (2003) investigated the demand function of South
African market by adopting a complex approach combining micro-and macro-economic theory. The study began
with an arbitrary demand system. Later, restrictionswere imposed on demand functions. Gang Li, Haiyan Song and
Stephen F. Witt (2006) developed a LAIDS model to forecast the demand of UK resident for tourism in Western
Europe destination by applying time vary parameter (TVP) in both long-run (LR) static and short-run correction(EC)
form. Wadud (2006) studied the meat demand including beef, chicken and mutton in Bangladesh by using the AIDS
model.
This paper applies the LAID model to evaluate the main Thai agricultural products exported to China; rice, rubber,
cassava, sugar, and durian. This will illustrate how Chinese customers think of Thai products whether they are
substituted goods or necessary goods. Consequently, this study would contribute to Thai farmer, trader, and
government agents to come up with proper production policy and supportive policy.
2. Empirical Model
The AIDS is a versatile system capable of studying various aspects of food demand and its various components. In
terms of budget shares, this is given by
where
wi=i + j (ij )log pj + i log (x/ P)
(1)
log P = 0 + k k log pk + 0.5 *kjkj log pk log pj
(2)
Equation (1) is a nonlinear parameter, Almost Ideal Demand System (AIDS) to be linearity in parameters with the
price index for 2, economist Deaton and Muellbauer (1980) has suggested Stone’s (1953) index (log P* = Wk log
pk ) as the approximated price index, log (P) in AIDS to create the new model so called Linear almost ideal demand
system (LAIDS).
wi=i + j (ij )log pj + i log (x/ P*)
where
i= 1,2,…, n
(3)
wi is budget-share of the ith commodity
pj is the price of the ith commodity
x is total expenditure on five Thailand export agricultural items
logP* is Wk log pk
(Stone’s index)
(4)
Since wiis the budget-share of the ith commodity, the combination of overall budget-share of all commodity will
also equal 1, [Wi = 1]. The parameter value in equation (3) will be placed with the limit of adding up to 1 as
following
n
n
i  1
Adding up:
 ij  0, for j  1,2,  , n
and ii = 0
(5)
i 1
i 1
Due to homogenous of degree one in prices of production cost, the budget share of the ith commodity placed in
equation (3) will be homogenous of degree zero in prices as in equation (6).
n
 ij  0,
Homogeneity:
for i  1,2,  , n
(6)
i 1
parameter is then symmetry as followed
~
~
 ij   ji , i  j
Symmetry:
(7)
The advantage of the AIDS model is that the homogeneity and symmetry restrictions are easily imposed and tested
(Md Abdul Wadud, 2006).
3. Data
Data in the study consists of total export volumes, total export amounts, and commodity prices. The commodity
price was determined by the values of exports divided by the volumes of exports. All data was acquired from the
Office of Agricultural Economics, Ministry of Agriculture and Co-operatives and Bank of Thailand.
It was
collected quarterly during 2005 to 2012.
This study applied LAIDS as in equation (3) in order to estimate demand volumes of major agricultural products
exported to China. logP* was calculated from equation (4)
wi=i + j (ij )log pj + i log (x/ P*)
where
i= 1, 2 ,…, 5
wi is the budget-share of the ithcommodity
Pi is the export price of the ith commodity(million Baht/ton)
x is total expenditure on five Thailand export agricultural items(million Baht)
i = 1, 2, …, 5 representing rice, rubber, cassava, sugar, and fresh durian, respectively.
In estimating parameter, constrains were applied to LAIDS to be adding up homogenous of degree zero in prices and
symmetry as in equation (5), (6), and (7), respectively.
Demand elasticity for export agricultural items (Eii), Cross demand elasticity (Eij), and Expenditure elasticity (i) for
this research study will be presented as the average of budget-share for all commodity;
Eii=

– 1 , Eij=

-1 and i=

+1
where
i= 1,2,…,5
j=1,2,…,5 and
i≠j
4. Econometric Results
The estimated parameters of the LAIDS for Thai agricultural products to China are presented in Table 1.
Table 1: Estimated Parameters of the LAIDS of Thai agricultural products to China during 2005 -2012
Parameters
log p1
log p2
log p3
log p4
log p5
log (x/p*)
Adjust R2
S.E.
DW.
w1
-0.039
(1.012)
-0.104
(0.096)
0.015
(0.021)
-0.064**
(0.032)
0.031
(0.029)
0.002*
(0.003)
0.384
0.015
1.485
w2
-0.018
(0.012)
0.261
(0.027)
-0.289
(0.015)
0.027**
(40.056)
0.054*
(0.011)
-0.005
(0.003)
0.417
0.010
1.468
w3
0.073*
(4.680)
0.034*
(0.050)
0.008
(0.019)
-0.173
(0.108)
0.044
(0.030)
-0.007
(0.002)
0.544
0.080
2.101
w4
0.025
(0.037)
0.129
(0.645)
-0.198
(0.028)
0.022**
(0.047)
0.078
(0.062)
0.022**
(0.005)
0.163
0.005
1.501
w5
-0.068
(0.103)
0.048*
(0.039)
0.084
(0.031)
0.003**
(0.068)
-0.051
(0.014)
0.028**
(0.016)
0.402
0.025
1.770
Note: * and ** refer to 5% and 10% significant levels, respectively. Values in parentheses are standard errors. S.E.
stands for the standard error, and DW for the Durbin-Watson statistic for the autocorrelation test. The estimates of
the other parameters are omitted due to space limits, but available from the authors upon request.
Table 1 illustrates coefficient of logp1in equation 1 to be -0.039, implying that if price for exported rubber to China
has increased by 1%, the budget-share of Thai rubber will decrease by 0.039, which was not significant. However,
coefficient of log(x/p*) is 0.002 representing that if the real expenditure for purchasing Thai exported items has
increased by 1%, budget-share of Thai rubber will increase by 0.002 with the significant level of 5%. The same
analytical approach is applied to the rest.
5. Elasticity Estimates
The estimates of own-price elasticities and expenditure elasticities are given in Table 2.
Table 2. Estimated own-price elasticities and expenditure elasticities for Thai agricultural products export to China,
2005-2013
Rubber
Cassava
Rice
Sugar
Durian
Expenditure
Rubber
-0.1674**
-0.7951**
-2.4782*
0.3015
0.7952
2.7451*
Cassava
0.4052*
-0.5912*
-1.1953*
1.1732**
1.0243
1.4583**
Rice
0.1648**
0.4871*
-1.1267**
1.3596
1.1970
1.3024*
Sugar
0.2413
0.6750*
1.0257
-1.7423*
-0.9534*
0.5217*
Durian
0.1876
0.3756
0.8964
0.3587
-1.5611
0.1826
Note: * and ** refer 5% and 10% significant levels, respectively.
The own-price elasticities were all found to be negative as expected. Whenever prices for five exported items; rice,
rubber, cassava, sugar, and fresh durian have increased by just only 1%, export volume will decrease by -0.1674, 0.5912, -1.1267, 1.7423, respectively. However, there was no significant in demand elasticity for fresh durian with
the value of -1.5611.
The result for demand elasticity in table 2 has suggested that cross elasticity of demand for exported rubber to
cassava is 0.4052 with significant level of 5% whereas cross elasticity of demand of cassava to rice is 0.1648 with
significant level of 10% which could conclude that Chinese customers have considered Thai exported rubber to be
substitution goods for cassava and rice.
Cross demand for exported cassava to price of exported rubber, rice, and sugar were -0.7951, 0.4871, and 0.6750,
respectively implying that Chinese customers consider cassava to be complementary goods to rubber whereas rice
and sugar are referred as substitution goods.
Expenditure elasticity in table 2 has shown that the price elasticity for demand towards expenditure elasticity of
rubber, cassava, rice, and sugar turn out to be 2.7451, 1.4583, 1.3024, 0.5217, respectively with significant level of
5% and 10 %. This indicates that if expenditure for Thai agricultural items in China has increased for just 1%,
purchasing volume for rubber, cassava, rice, and sugar will increase by 2.7451%, 1.4583%, 1.3024%, and 0.5217%,
respectively, whereas there is no significant in demand elasticity being explored for fresh durian.
6. Conclusions
The results suggest that China use cassava as complimentary goods with rubber whereas rice is considered
complimentary goods with cassava and rubber. Furthermore, rubber is substitution goods for rice and cassava while
rice is considered to be substitution goods for sugar and fresh durian. Moreover, fresh durian is substitution goods
for sugar. Chinese customers considered rubber, cassava, and rice from Thailand to be luxury goods, mainly for
people with high income. Sugar and fresh durian, however, are referred as inferior goods, consumed by middle
income Chinese customers.
The policy makers could encourage price policy in exporting these agricultural products; rubber, sugar, and fresh
durian as they are price sensitive. On the other hand, the complimentary goods; rubber, cassava, and rice, could be
promoted for exporting since even only one product’s sales volume have increased, the demand for other products
would be raised directly.
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