Measuring the Impact of Price Changes on Poverty

This paper develops a m ethodology to m easure the im pact of price changes on poverty m easured by an entire class of additive separable poverty m easures. This im pact is captured by m eans of price elasticity of poverty. The total effect of changes in price on poverty is explained in term s of tw o com ponents. The first com ponent is the incom e effect of the change in price and the second is the distribution effect captured by the price changes. It is the distribution effect w hich determ ines w hether the price changes benefit the poor proportionally m ore (or less) than the non-poor. This paper also derives a new price index for the poor (PIP). W hile this index can be com puted for any poverty m easures, our em pirical analysis applied to Brazil is based on three poverty m easures, the head-count ratio, the poverty gap ratio and the severity of poverty. The em pirical results show that price changes in Brazil during the 1999-2006 period have occurred in a w ay that favors the non-poor proportionally m ore than the poor. N evertheless, during the last 2-3 years the price changes have favored the poor relative to the non-poor. Keyw ords: Inflation, Price elasticity, M oney m etric utility, Price index for the poor, Pro-Poor, Poverty. JEL Classification: B41, D 11, D 12, E31, I32, O 54 ∗ The authors are grateful to Rafael O sorio for his invaluable assistance and excellent w ork in m atching price data w ith a household survey for a large num ber of com m odities. W e also w ould like to acknow ledge Sergei Soares, M arcelo N eri and M arcelo M edeiros for their helpful com m ents. ∗∗ E-m ail address for correspondence: hyun.son@ undp-povertycentre.org ; Tel: 55-61-2105 5025; Fax: 55-61-2105 5001/5002. 2 International Poverty Centre W orking Paper no 33