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Citation Information

Type Journal Article - Center for Global Development Working Paper
Title Estimating Income/Expenditure Differences Across Populations: New Fun with Old Engel’s Law
Author(s)
Issue 339
Publication (Day/Month/Year) 2013
URL http://cgdev.org.488elwb02.blackmesh.com/sites/default/files/estimating-income-expenditure-differenc​es-populations_wcvr_2.pdf
Abstract
How much larger are the consumption possibilities of an urban US household with per capita expenditures
of 1,000 US dollars per month than a rural Indonesian household with per capita expenditures of 1,000,000
Indonesian Rupiah per month? Consumers in different markets face widely different consumption
possibilities and prices and hence the conversion of incomes or expenditures to truly comparable units
of purchasing power is extremely difficult. We propose a simple supplement to existing purchasing power
adjusted currency conversions.
The Pritchett-Spivack Ratio (PSR) estimates the differences in household per capita expenditure using a
simple inversion of the Engel’s law relationship between the share of food in consumption and total income/
expenditures. Intuitively, we ask: “How much higher (as a ratio) would the expenditures of a household at
1,000,000 Indonesian Rupiah need to be along a given Engel relationship before they were predicted to have
the same food share as a US household with consumption of 1,000 US dollars?” The striking empirical
stability of Working-Lesser Engel coefficient estimates across time and space and widely available estimates
of consumptions expenditures and hence food shares allow us to make two robust points using the PSR.
First, the consumption of the typical (median) household in a developing country would have to rise 5 to
10 fold to reach that of a household at the poverty line in an OECD country. Second, even the “rich of the
poor”—the 90th or 95th percentile in developing countries—have food shares substantially higher than the
“poor of the rich.”

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