Kenneth W. Clements

The Demand for Beer, Wine, and Spirits: A Systemwide Analysis

The systemwide approach to the analysis of consumer demand considers the multivariate structure of the problem in which the consumer allocates his income to all goods simultaneously. This approach combines the theory of the consumer with empirical analysis and has enjoyed much popularity over the past decade. For surveys of these developments, see Brown and Deaton (1972), Phlips (1974), Powell (1974), Theil (1975-76, 1980), Barten (1977), and Theil and Clements (1980). Most previous applications of the systemwide approach have used national accounts commodity groups (food, clothing, housing, and so on). For many business and government policy purposes, however, these groups are much too broad. For example, to analyze the effects on consumption of all but the simplest changes in indirect taxes, we would need considerably more disaggregation. Similarly, market researchers need to analyze demand at the individual product level for purposes of forecasting and formulating pricing and other policies. The objective of this paper is to use the consumption of beer, wine, and spirits to illustrate how the approach can be apThis paper illustrates how the systemwide approach to consumer demand can be extended so that it can be applied to narrowly defined commodity groups. We use the consumption of beer, wine, and spirits to show how the approach can be applied to estimate income and price elasticities of demand. When the consumers utility function is appropriately separable in alcoholic beverages and all other goods, it is possible to confine our attention to the three beverages and ignore all other goods. We use the demand model for a number of simulations designed to analyze the rapid growth of wine consumption. * We are indebted to John Davis, Peter Goldschmidt, and Kal Stening for excellent research assistance, to Michael Wohlgenant and Henri Theil for helpful comments and discussion, and to the New South Wales Drug and Alcohol Authority for their partial financial support of this research.

The Measurement of Inflation: A stochastic approach

The stochastic approach to index number theory views each commodity price change as an independent observation on the underlying rate of inflation so that inflation can be estimated by averaging over all the prices. This article extends the approach by (a) allowing for sustained changes in relative prices, (b) showing the link with Divisia index numbers, and (c) deriving standard errors for the inflation estimates. The results are illustrated with Australian data.

Is utility additive? The case of alcohol

The hypothesis of additive utility (or preference independence) is often applied to the demand for broad aggregates. Recent testing provides some evidence favourable to the hypothesis, thus overturning the older results based on the standard asymptotic tests which are seriously biased against the null in small samples. Using data for seven countries and a variety of tests, this paper shows that preference independence also cannot be rejected for more narrowly defined commodities - beer, wine and spirits. The implications of the results for efficient taxation of alcoholic beverages are also explored.

Understanding Consumption Patterns

The analysis of consumer demand is one of the major successes of economics as it represents the near perfect marriage of theory and econometrics. This paper reviews, distills and systematises some of the major empirical findings on consumption patterns, concentrating in particular on the more recent (and, in some cases, more controversial) evidence. One of the key conclusions of the paper is that on the basis on new methods, the hypotheses of homogeneity, symmetry and preference independence are not at such wide variance with the data as was once thought to be the case.

Divisia moments of Australian consumption

Abstract Quarterly Australian consumption data, 1959–1978, are used to compute Divisia price and quantity indexes, together with Divisia variances and covariances. The quantity variances tend to exceed the price variances, and the price-quantity covariances are mostly negative. Estimates of the income flexibility are also presented.

A General Equilibrium Econometric Model of the Open Economy

This paper is concerned with the specification and estimation of a small-scale multisector econometric model of an open economy. The model is formulated with the ultimate aim of assessing empirically the e-ffects of three key policy variables on trade flows, domestic prices, and the trade balance. The policy variables with which we are concerned are the rate of growth of the stock of domestic credit, commercial policy and the exchange rate. The model has its foundations in the general equilibrium models which are well known from the pure theory of international trade (e.g., Johnson [1971] and Jones [1965]), and it possesses three important general equilibrium characteristics. First, the economys production point is constrained to lie on the transformation surface, the location and shape of which are determined by the economys factor endowment and by techniology. Second, the behavior of consumers satisfies the three general demand-theoretic restrictions of homogeneity, symmetry of the substitution effects, and additivity. The final general equilibrium characteristic of the model is the role of the budget constraint. As emphasized by the absorption approach to the balance of payments (Alexander [1952]), an excess of imports over exports, for example, means that, from the budget constraint, domestic expenditure exceeds income. The role of the budget constraint is, therefore, to link imports, exports, domestic expenditure and income. This link is explicit in the model. There are three fundamental building blocks of the model. The first is a system of demand equations which represent the domestic consumer demands for the n individually distinguished commodities. The specific functional form

Fundamental Similarities in Consumer Behaviour

Diversities and similarities in international consumption patterns are highlighted. A large body of data is used to identify cross-country consumption differences and to understand these in terms of the familiar utility-maximizing framework, in which observed differences in prices and incomes play the key role. Taken as a whole, the results reveal a surprising degree of similarity in international consumption patterns and support the idea that tastes are constant, at least with respect to broad commodity groups.

A simple portfolio allocation model of financial wealth

Abstract This paper introduces a simple but highly flexible portfolio allocation model which provides a convenient framework for testing and imposing considerable structure on the data. The model is estimated with Australian data for four financial assets, fixed deposits, savings bank deposits, building society deposits and holdings of a class of government bonds. In contrast to previous findings, interest rate coefficients are estimated precisely and indicate quite a high degree of substitutability.

Forecasting steel demand in China

Abstract Chinese steel demand will grow from 60 million tons in the late 1980s to 100 million tons by the year 2000. The Chinese steel market will then rank equal with markets in Japan, the USA and the European Community. Chinese steel demand is predicted to stay below the level of 1988 until 1992. After a strong recovery in 1992-93, steel demand will then grow at 5% per annum in the second half of the 1990s. These forecasts are generated by a vector autoregressive model of the Chinese economy. The VAR models the joint serial correlation between output, price level, money stock, investment and steel.

Pricing and Packaging: The Case of Marijuana*

In many markets, unit prices decline as the quantity purchased rises, a phenomenon that can be considered part of the economics of packaging. This article reviews the economic foundations of quantity discounts and proposes new ways of measuring and analyzing them. These ideas are implemented with the prices of marijuana, a product that is shown to be priced in a manner not too different from that used for groceries as well as some other illicit drugs. In broad terms, the results support the following pricing rule: the unit price falls by 2.5% when the package size increases by 10%.