Aggregate expenditure elasticity for transport and communication in Australia

For the purpose of estimating Engel elasticity, one needs to find the best functional form among various alternatives. In this paper, a new function, which is called the double semi-log Engel function turns out to be the best functional form for the transport and communication items in Australia on the basis of the distance function (D²) criterion, and the non-nested hypothesis testing procedure. This function is then used to estimate total expenditure elasticity, and the percentage change in consumer demand due to changes in total expenditure and total expenditure inequalities; using the 1975–76 Household Expenditure Survey data. The results of the analyses demonstrate that transport and communication is a necessary item in Australia on the basis of two criteria, viz., its elasticity is not significantly greater than unity, and the percentage change in demand increases with a decrease of the total expenditure inequality [emphasised by Iyengar (I960)]. Policy implication of the analyses has also been discussed.