Price Adjustments and Poverty Measurement
Measuring poverty entails making interpersonal welfare comparisons, that should account for differences in prices faced by households, both over time and across space. This paper investigates the impact of seemingly minor differences in the practical implementation of price adjustments, by developing an analytical framework that is consistent with standard consumer theory and mindful of the data limitations faced by practitioners. The main result is at odds with common sense: even when multiple price indexes are available, say a food and a nonfood Consumer Price Index, it turns out that using a single price index, the total Consumer Price Index, to adjust the consumption aggregate is recommended. The practice of adjusting the components of the consumption aggregate separately, using matching deflators—food expenditure with the food index and nonfood expenditure with the nonfood index—can lead to a systematic bias in the welfare measure, and consequently in poverty and inequality measures. The direction of the bias can be easily predicted based on the price level and household consumption patterns. On the interplay between spatial and temporal deflation, the findings show that temporal deflation should be carried out before implementing adjustments to spatial cost-of-living differences. The paper illustrates these findings using the Islamic Republic of Iran’s 2019 Household Income and Expenditure survey: the bias in the headcount poverty rate due to incorrect deflation is substantive (5–10 percent for estimates at the national level, 15–20 percent in urban and rural areas, and more than 30 percent for district-level headcount rates). Higher-order Foster-Greer-Thorbecke poverty measures are even more affected.
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Format: | Working Paper biblioteca |
Language: | English English |
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World Bank
2023-05-01
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Subjects: | POVERTY, INEQUALITY, PRICE ADJUSTMENT, PRICE INDEXES, COST-OF-LIVING DIFFERENCES, INFLATION, POVERTY MEASUREMENT, HOUSEHOLD INCOME AND EXPENDITURE SURVEY, |
Online Access: | http://documents.worldbank.org/curated/en/099311104272341601/IDU06af3b51809e4e049840b03f03e26a6c1f357 https://openknowledge.worldbank.org/handle/10986/39759 |
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dig-okr-10986397592024-03-11T19:22:21Z Price Adjustments and Poverty Measurement Amendola, Nicola Mancini, Guilia Redaelli, Silvia Vecchi, Giovanni POVERTY INEQUALITY PRICE ADJUSTMENT PRICE INDEXES COST-OF-LIVING DIFFERENCES INFLATION POVERTY MEASUREMENT HOUSEHOLD INCOME AND EXPENDITURE SURVEY Measuring poverty entails making interpersonal welfare comparisons, that should account for differences in prices faced by households, both over time and across space. This paper investigates the impact of seemingly minor differences in the practical implementation of price adjustments, by developing an analytical framework that is consistent with standard consumer theory and mindful of the data limitations faced by practitioners. The main result is at odds with common sense: even when multiple price indexes are available, say a food and a nonfood Consumer Price Index, it turns out that using a single price index, the total Consumer Price Index, to adjust the consumption aggregate is recommended. The practice of adjusting the components of the consumption aggregate separately, using matching deflators—food expenditure with the food index and nonfood expenditure with the nonfood index—can lead to a systematic bias in the welfare measure, and consequently in poverty and inequality measures. The direction of the bias can be easily predicted based on the price level and household consumption patterns. On the interplay between spatial and temporal deflation, the findings show that temporal deflation should be carried out before implementing adjustments to spatial cost-of-living differences. The paper illustrates these findings using the Islamic Republic of Iran’s 2019 Household Income and Expenditure survey: the bias in the headcount poverty rate due to incorrect deflation is substantive (5–10 percent for estimates at the national level, 15–20 percent in urban and rural areas, and more than 30 percent for district-level headcount rates). Higher-order Foster-Greer-Thorbecke poverty measures are even more affected. 2023-05-01T17:54:36Z 2023-05-01T17:54:36Z 2023-05-01 Working Paper http://documents.worldbank.org/curated/en/099311104272341601/IDU06af3b51809e4e049840b03f03e26a6c1f357 https://openknowledge.worldbank.org/handle/10986/39759 English en Policy Research Working Papers; 10426 CC BY 3.0 IGO https://creativecommons.org/licenses/by/3.0/igo/ World Bank application/pdf text/plain World Bank |
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POVERTY INEQUALITY PRICE ADJUSTMENT PRICE INDEXES COST-OF-LIVING DIFFERENCES INFLATION POVERTY MEASUREMENT HOUSEHOLD INCOME AND EXPENDITURE SURVEY POVERTY INEQUALITY PRICE ADJUSTMENT PRICE INDEXES COST-OF-LIVING DIFFERENCES INFLATION POVERTY MEASUREMENT HOUSEHOLD INCOME AND EXPENDITURE SURVEY |
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POVERTY INEQUALITY PRICE ADJUSTMENT PRICE INDEXES COST-OF-LIVING DIFFERENCES INFLATION POVERTY MEASUREMENT HOUSEHOLD INCOME AND EXPENDITURE SURVEY POVERTY INEQUALITY PRICE ADJUSTMENT PRICE INDEXES COST-OF-LIVING DIFFERENCES INFLATION POVERTY MEASUREMENT HOUSEHOLD INCOME AND EXPENDITURE SURVEY Amendola, Nicola Mancini, Guilia Redaelli, Silvia Vecchi, Giovanni Price Adjustments and Poverty Measurement |
description |
Measuring poverty entails making
interpersonal welfare comparisons, that should account for
differences in prices faced by households, both over time
and across space. This paper investigates the impact of
seemingly minor differences in the practical implementation
of price adjustments, by developing an analytical framework
that is consistent with standard consumer theory and mindful
of the data limitations faced by practitioners. The main
result is at odds with common sense: even when multiple
price indexes are available, say a food and a nonfood
Consumer Price Index, it turns out that using a single price
index, the total Consumer Price Index, to adjust the
consumption aggregate is recommended. The practice of
adjusting the components of the consumption aggregate
separately, using matching deflators—food expenditure with
the food index and nonfood expenditure with the nonfood
index—can lead to a systematic bias in the welfare measure,
and consequently in poverty and inequality measures. The
direction of the bias can be easily predicted based on the
price level and household consumption patterns. On the
interplay between spatial and temporal deflation, the
findings show that temporal deflation should be carried out
before implementing adjustments to spatial cost-of-living
differences. The paper illustrates these findings using the
Islamic Republic of Iran’s 2019 Household Income and
Expenditure survey: the bias in the headcount poverty rate
due to incorrect deflation is substantive (5–10 percent for
estimates at the national level, 15–20 percent in urban and
rural areas, and more than 30 percent for district-level
headcount rates). Higher-order Foster-Greer-Thorbecke
poverty measures are even more affected. |
format |
Working Paper |
topic_facet |
POVERTY INEQUALITY PRICE ADJUSTMENT PRICE INDEXES COST-OF-LIVING DIFFERENCES INFLATION POVERTY MEASUREMENT HOUSEHOLD INCOME AND EXPENDITURE SURVEY |
author |
Amendola, Nicola Mancini, Guilia Redaelli, Silvia Vecchi, Giovanni |
author_facet |
Amendola, Nicola Mancini, Guilia Redaelli, Silvia Vecchi, Giovanni |
author_sort |
Amendola, Nicola |
title |
Price Adjustments and Poverty Measurement |
title_short |
Price Adjustments and Poverty Measurement |
title_full |
Price Adjustments and Poverty Measurement |
title_fullStr |
Price Adjustments and Poverty Measurement |
title_full_unstemmed |
Price Adjustments and Poverty Measurement |
title_sort |
price adjustments and poverty measurement |
publisher |
World Bank |
publishDate |
2023-05-01 |
url |
http://documents.worldbank.org/curated/en/099311104272341601/IDU06af3b51809e4e049840b03f03e26a6c1f357 https://openknowledge.worldbank.org/handle/10986/39759 |
work_keys_str_mv |
AT amendolanicola priceadjustmentsandpovertymeasurement AT manciniguilia priceadjustmentsandpovertymeasurement AT redaellisilvia priceadjustmentsandpovertymeasurement AT vecchigiovanni priceadjustmentsandpovertymeasurement |
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