Welfare Analysis of Food and Energy Inflation: A Representative Agent Approach with the Lesotho Working Class

The IUP Journal of Applied Economics, Vol. X, No. 1, pp. 55-70, January 2011

Posted: 8 Mar 2011

See all articles by Powell L. Mohapi

Powell L. Mohapi

Universal Access Fund

Retselisitsoe I. Thamae

National University of Lesotho

Date Written: March 6, 2011

Abstract

The global price surge in food and energy in recent years has put considerable strain on consumers. This is especially so because food and energy are the elements of consumer’s non-discretionary spending. Confining interest to the working class in Lesotho, this work is an attempt to quantify the welfare impact of food and energy inflation. Using the representative agent with constant returns-to-scale Cobb-Douglas preferences, the paper evaluates two complementary approaches to determine the welfare impacts of price increases on the workers. The standard of living evaluation is captured by the agent’s reallocation of income proportions between food, energy and other discretionary spending items. The other approach is computing the income adjustment required to immunize the worker from the effects of price increases. Low income workers are hardest hit by food and energy inflation, while the high income workers are least affected. These two approaches seem to be complementary because the percentage fall in the representative worker’s standard of living requires roughly the same percentage increase in disposable income to be restored. Consequently, low income workers should be awarded the highest percentage raise in income, while the high income workers should receive comparatively low percentage increase in income.

Suggested Citation

Mohapi, Powell L. and Thamae, Retselisitsoe I., Welfare Analysis of Food and Energy Inflation: A Representative Agent Approach with the Lesotho Working Class (March 6, 2011). The IUP Journal of Applied Economics, Vol. X, No. 1, pp. 55-70, January 2011, Available at SSRN: https://ssrn.com/abstract=1779703

Powell L. Mohapi (Contact Author)

Universal Access Fund ( email )

Kingsway Road, PO Box 15896
Maseru
Lesotho

Retselisitsoe I. Thamae

National University of Lesotho ( email )

P.O. Roma 180
Maseru
Lesotho

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