Estimation and application of a complete demand system for the United Arab Emirates

Purpose – The purpose of this paper is to estimate a complete demand system for the United Arab Emirates (UAE) and use the estimates to evaluate the welfare impact of price inflation. Eight expenditure groups are considered: food, clothing, housing, furniture, transportation, medical care, recreation, and miscellaneous. Design/methodology/approach – Household survey data are used to estimate the elasticities separately for Emiratis and expatriates by income quintile using seemingly unrelated regression within a Linear Expenditure System that accounts for demographic variables. Findings – Welfare loss is inversely related to income quintile and is lower for Emirati households. Transportation, housing, and food are the sources of the bulk of the welfare loss. The shares of the three consumption groups, combined with their respective inelastic demands, explain why they figure prominently as the leading sources of welfare loss when their prices rise. Originality/value – First ever demand system estimated for the UAE. Welfare loss estimates provide some rational basis on which examination may be made of existing UAE policies that effect commodity prices, like price controls, and policies currently being discussed, like commodity taxation, and their distributional effects.