Cross-Price and Income Elasiticity of Food

From EconomicsHelp.org, an example of cross-price and income elasiticities of food.  The data comes from an interactive, query-able database of international food elasticities at the US Dept of Agriculture. By using these elasticities, we can estimate the impact(s) of food price increases. In times such as 2011, when international foodstuff commodities such as wheat, corn, and soybeans are rising significantly because of drought, bad harvests, and rising demand, economists can use these estimates to figure out the impact in different countries, both in terms of total money that must be switched from other spending to food, but also which other products or services will be hurt or helped by such budget re-allocations  consumers.

This graph shows the Cross Elasticity of demand for various goods with respect to food.

I choose two countries – Bangladesh (low income) and the UK (relatively high income)

Source: [link]

What this means is that if the price of food rises 10%, then in the UK, demand for education falls by about 0.05%.

However, Bangladesh has a Cross Elasticity of demand of 0.32. Therefore a 10% rise in food prices would cause a 3.2% fall in demand.

The highest cross elasticity of demand is for recreation. Recreation is what we would call a luxury good. If income falls, we can lose spending on recreation because it is not essential.

It shows that for a poor country like Bangladesh, if food prices go up, it means a significant fall in spending on recreation. Demand in the UK remains mostly unchanged.

It’s a good example of how rising food prices will have much different effects in different countries. When food prices rise in the UK, it is an inconvenience. When food prices rise in developing countries, it makes families rearrange their whole budget.