I was delighted by yesterday's announcement that Angus Deaton has been awarded the Nobel Prize in Economic Science this year. His contributions have have been many, fundamental, and varied, and I certainly won't attempt to summarize them here. Suffice to say that the official citation says that the award is "for his contributions to consumption, poverty, and welfare".
In this earlier post I made brief mention of Deaton's path-breaking work, with John Muellbauer, that gave us the so-called "Almost Ideal Demand System".
The AIDS model took empirical consumer demand analysis to a new level. It facilitated more sophisticated, and less restrictive, econometric analysis of consumer demand behaviour than had been possible with earlier models. The latter included the fundamentally important Linear Expenditure System (Stone, 1954), and the Rotterdam Model (Barten, 1964; Theil, 1965).
I thought that readers may be interested in an empirical exercise with the AIDS model. Let's take a look at it.