Measuring the impact of price changes on poverty

Abstract

This paper develops a methodology to measure the impact of price changes on poverty measured by an entire class of additive separable poverty measures. This impact is captured by means of the price elasticity of poverty. The total effect of changes in price on poverty is explained in terms of two components, income and distribution effects. The income effect measures the change in poverty when all prices increase uniformly, whereas the distribution effect captures the change in poverty because of changes in relative prices. Using this decomposition, the paper derives an empirically operational index, which reveals whether the price changes have been pro-poor or anti-poor. The paper also derives a new price index for the poor. While this index can be computed for any poverty measures, our empirical analysis applied to Brazil is based on three poverty measures, the head-count ratio, the poverty gap ratio and the severity of poverty. The empirical analysis shows that price changes in Brazil during the 1999-2006 periods have been anti-poor. Nevertheless, during the last 2 to 3 years, the price changes have affected the poor less adversely than the non-poor.