Estimating Income/Expenditure Differences Across Populations: New Fun with Old Engel's Law

45 Pages Posted: 8 Jan 2014  

Lant Pritchett

Harvard University - Harvard Kennedy School (HKS); Center for Global Development

Marla Spivack

Center for Global Development

Date Written: August 27, 2013

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 to10 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."

Keywords: Engel curve, material standard of living, international development, poverty assessment income inequality

JEL Classification: O10, I32, D12, D31

Suggested Citation

Pritchett, Lant and Spivack, Marla, Estimating Income/Expenditure Differences Across Populations: New Fun with Old Engel's Law (August 27, 2013). Center for Global Development Working Paper No. 339. Available at SSRN: https://ssrn.com/abstract=2364649 or http://dx.doi.org/10.2139/ssrn.2364649

Lant Pritchett (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-496-4562 (Phone)
617-496-2554 (Fax)

HOME PAGE: http://ksghome.harvard.edu/~lpritch/

Center for Global Development

2055 L St. NW
5th floor
Washington, DC 20036
United States

Marla Spivack

Center for Global Development ( email )

2055 L St. NW
5th floor
Washington, DC 20036
United States

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