Question

It is sometimes asserted that rice in very poor Asian countries might be an inferior good. Even though there is no evidence that this is indeed the case, explain the reasoning behind this assertion.

Answer 1

Rice is a staple food in many poor Asian countries like Myanmar and Cambodia. Rice is cited as an inferior good because as the income of an individual increases, less and less of rice is being consumed. According to the Food and Agricultural Organization, the market for rice is very limited and concentrated on mostly Asian nations. Rice is looked upon as a major source of carbohydrates but as the income of an individual rises, he/she is likely to consume more healthy food like meat or protein-based products.

In Japan, there has been a negative association between the consumption of rice and the rise in income/GDP post the 1960s. Some studies highlight that rice is itself is being substituted with fortified rice due to high nutritional value. The rich individuals are also engaging in the consumption of noodles, bread, and non-traditional Japanese food. This indicates that there is an emergence of westernization because of which food and consumption habits in poor Asian countries are changing.

Rice is considered as inferior good since the income elasticity of demand is less than 1. But the rice is itself being a basic necessity and at a higher level of income it is being substituted by luxurious goods. This justifies Engel`s law, where with the income rises the expenditure on basic commodities falls.