Household Demand in Turkey: An Application of Almost Ideal Demand System with Spatial Cost Index

A common difficulty in estimating demand functions for developing countries is the lack of time series data. With the available cross-sectional data resulting from extensive surveys on households, most researchers concentrated on the estimation of expenditure elasticities and ignored the price elasticities. Obviously, the results of this kind of partial analysis may not be very reliable for policy design. In this paper, a practical solution is provided by observing that regularly collected data on the cost of grouped commodity bundles across regions can reflect the spatial variation in prices and thus can be used as a proxy for the prices. As compared to previous studies estimating only the expenditure elasticities for Turkey, our results are different, in some cases with large margins. Thus, as expected, incorporation of prices into the demand analysis is vital not only in obtaining the price elasticities, but also in getting reliable estimates of the expenditure elasticities.