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When More Poor Means Less Poverty: On Income Inequality and Purchasing Power

Author

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  • Andreas Bergh

    () (Research Institute of Industrial Economics (IFN) and Department of Economics, Lund University, Sweden)

  • Therese Nilsson

    () (Research Institute of Industrial Economics (IFN) and Department of Economics, Lund University, Sweden)

Abstract

We show theoretically that the poor can benefit from price changes induced by higher income inequality. As the number of poor increases, the market for products aimed toward the poor grows, and such products become more profitable. As a result, there are circumstances where an increase in income inequality associates with higher purchasing power of the poor. Using cross-country data on the price of one kilogram of rice and the price of a Big Mac hamburger, we confirm a negative association between income inequality and the price of inferior goods, robust to the inclusion of a large set of control variables. Results are also robust to a first difference specification and to a two-stage instrumental variables approach. Examining economic well-being, it is thus important to analyze not only the incomes of households, but also the prices of the products and services that they buy.

Suggested Citation

  • Andreas Bergh & Therese Nilsson, 2014. "When More Poor Means Less Poverty: On Income Inequality and Purchasing Power," Southern Economic Journal, Southern Economic Association, vol. 81(1), pages 232-246, July.
  • Handle: RePEc:sej:ancoec:v:81:1:y:2014:p:232-246
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    File URL: http://dx.doi.org/10.4284/0038-4038-2013.008
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    References listed on IDEAS

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    1. Pendakur, Krishna, 2002. "Taking prices seriously in the measurement of inequality," Journal of Public Economics, Elsevier, vol. 86(1), pages 47-69, October.
    2. Daron Acemoglu & Joshua Linn, 2004. "Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry," The Quarterly Journal of Economics, Oxford University Press, vol. 119(3), pages 1049-1090.
    3. Deaton, Angus & Paxson, Christina, 1994. "Intertemporal Choice and Inequality," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 437-467, June.
    4. Dirk Krueger & Fabrizio Perri, 2006. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory -super-1," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 163-193.
    5. Dave D. Weatherspoon & Thomas Reardon, 2003. "The Rise of Supermarkets in Africa: Implications for Agrifood Systems and the Rural Poor," Development Policy Review, Overseas Development Institute, vol. 21, pages 333-355, May.
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    Citations

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    Cited by:

    1. Bjørnskov, Christian, 2015. "Does economic freedom really kill? On the association between ‘Neoliberal’ policies and homicide rates," European Journal of Political Economy, Elsevier, vol. 37(C), pages 207-219.
    2. Abhimanyu Dadu & Namrata Gulati, 2014. "Inequality, neighborhoods and variation in prices," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2014-001, Indira Gandhi Institute of Development Research, Mumbai, India.
    3. Namrata Gulati & Abhimanyu Dadu, 2014. "Inequality, Neighbourhoods and Variation in Prices," Economics Bulletin, AccessEcon, vol. 34(3), pages 1463-1484.

    More about this item

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General

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