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Estimating household responses to trade reforms : net consumers and net producers in rural Mexico

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Porto, Guido G.

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Abstract

This paper explores an empirical methodology to assess the impacts of trade reforms on household behavior in developing countries. It focuses on consumption and income responses: when price reforms take place, households modify consumption and production decisions and local labor markets adjust. The paper proposes a joint estimator of demand and wage price elasticities from survey data. The method uses an empirical model of demand to extract price information from unit values, and uses this information to estimate the response of households to price reforms. By correcting unit values for quality effects and measurement error, the method overcomes the problem of the endogeneity of unit values. By endogeneizing household income, the model corrects potential biases in the estimation of own- and cross-price elasticities in consumption. The paper applies the method to an expenditure and income survey for rural Mexico. It shows that the corrections suggested in this paper are empirically important. In particular, it shows that allowing for consumption and income responses is a key element of an accurate empirical assessment of trade policy.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3695.

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Date of creation: 01 Sep 2005
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Handle: RePEc:wbk:wbrwps:3695

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Keywords: Environmental Economics&Policies Economic Theory&Research Access to Markets Markets and Market Access Inequality

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  1. Deaton, Angus, 1988. "Quality, Quantity, and Spatial Variation of Price," American Economic Review, American Economic Association, vol. 78(3), pages 418-30, June. [Downloadable!] (restricted)
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  2. Edmonds, Eric V. & Pavcnik, Nina, 2005. "The effect of trade liberalization on child labor," Journal of International Economics, Elsevier, vol. 65(2), pages 401-419, March. [Downloadable!] (restricted)
  3. Case, Anne & Deaton, Angus, 1998. "Large Cash Transfers to the Elderly in South Africa," Economic Journal, Royal Economic Society, vol. 108(450), pages 1330-61, September. [Downloadable!] (restricted)
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  4. Deaton, Angus, 1987. "Estimation of own- and cross-price elasticities from household survey data," Journal of Econometrics, Elsevier, vol. 36(1-2), pages 7-30. [Downloadable!] (restricted)
  5. Ravallion, Martin, 1990. "Rural Welfare Effects of Food Price Changes under Induced Wage Responses: Theory and Evidence for Bangladesh," Oxford Economic Papers, Oxford University Press, vol. 42(3), pages 574-85, July. [Downloadable!] (restricted)
  6. Eric V. Edmonds, 2007. "Child Labor," IZA Discussion Papers 2606, Institute for the Study of Labor (IZA). [Downloadable!]
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  7. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June. [Downloadable!] (restricted)
  8. Porto, Guido G., 2006. "Using survey data to assess the distributional effects of trade policy," Journal of International Economics, Elsevier, vol. 70(1), pages 140-160, September. [Downloadable!] (restricted)
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  9. Deaton, A. & Grimard, F., 1992. "Demand Analysis and Tax Reform in Pakistan," Papers 85, World Bank - Living Standards Measurement.
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Klytchnikova, Irina & Diop, Ndiame, 2006. "Trade reforms, farm productivity, and poverty in Bangladesh," Policy Research Working Paper Series 3980, The World Bank. [Downloadable!]
  2. Charles Ackah, & Simon Appleton, . "Food Price Changes and Consumer Welfare in Ghana in the 1990s," Discussion Papers 07/03, University of Nottingham, CREDIT. [Downloadable!]
  3. Sylvain Chabe-Ferret & Julien Gourdon & Mohamed Ali Marouani & Tancrède Voituriez, 2007. "Trade-Induced Changes in Economic Inequality: Assessment Issues and Policy Implications for Developing Countries," Working Papers DT/2007/11, DIAL (Développement, Institutions & Analyses de Long terme). [Downloadable!]
    Other versions:
  4. Isik-Dikmelik, Aylin, 2006. "Trade reforms and welfare : an ex-post decomposition of income in Vietnam," Policy Research Working Paper Series 4049, The World Bank. [Downloadable!]
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