The Effect of Regional Price Adjustment of Household Expenditures on Poverty Indices in Iran’s Urban Areas

Accurate Measuring of poverty and its distribution in various areas, in addition to being crucial for cognitive purposes, could have different policy implications and affect policy assessments. The Household expenditures criteria is typically used to measure poverty, and poverty is often assessed using a poverty line and alternative indices. A major difficulty associated with this method is, however, that it fails to take the purchasing power of money in different areas into account. In fact, households with the same amount of expenditures living in areas with higher price levels enjoy lower levels of welfare in comparison with those living in areas with lower price levels. Since the consumer price index cannot reflect the difference between price levels in different areas, this index is not useful for evaluating differences in purchasing power. In this paper, we shall first present an index which reflects price levels in the Iranian year ending in March 2012, and then we shall test the equality of poverty measures hypothesis before and after adjusting expenditures with the proposed price level index using statistical tests and the dominance approach. According to the results, and regardless of the defined poverty line, adjusting expenditures based on all poverty measures characterized by a week monotonicity, will reduce the calculated poverty measures. Furthermore, after adjustment, the ranking of provinces with respect to poverty will drastically change. This could change the share of each province in reducing poverty budgets. JEL Classification: C40, E31, I32