Poverty Price Indices

Abstract

AbstractPrices play an essential role in people’s lives. If society’s concern is to protect the poor, knowing how prices affect them is crucial. The main objective of this chapter is to measure the impact of price changes on poverty. The chapter has achieved this objective by developing a new consumer demand theory methodology. Developing countries collect a significant amount of revenue from indirect taxes. How should governments determine tax rates on various goods and services? These rates have both direct and indirect impacts on the prices of goods and services. Governments can determine these tax rates to have a minimum effect on poverty. The poverty elasticity with respect to prices and the pro-poor index developed in the chapter provides valuable tools to determine tax rates. This chapter also creates a price index for the poor, systematically capturing the poor’s consumption patterns through poverty price elasticity. While this index can be computed for any poverty measure, this chapter has focused on three poverty measures: the head-count ratio, the poverty gap ratio, and the severity of poverty. All three poverty measures show that Brazil’s price changes during the 1999–2006 period have favored the non-poor proportionally more than the poor.