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

We show theoretically that the poor can benefit from price changes induced by higher income inequality. As the number of poor in a society increases, or when the income difference between rich and poor increases, the market for products aimed towards the poor grows and such products become more profitable. As a result, there are circumstances where an increase in poverty associates with higher purchasing power of the poor. Using cross-country data at two points in time on the price of rice and Big Mac hamburgers, we confirm the relationship between inequality and purchasing power of the poor, and show that it is robust to several control variables and also to a first-difference specification.

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Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 900.

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Length: 14 pages
Date of creation: 24 Jan 2012
Date of revision:
Publication status: Published as Bergh, Andreas and Therese Nilsson, 'When More Poor Means Less Poverty: On Income Inequality and Purchasing Power' in Southern Economic Journal, 2014, pages 232-246.
Handle: RePEc:hhs:iuiwop:0900
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  1. 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, 05.
  2. Daron Acemoglu & Joshua Linn, 2004. "Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry," The Quarterly Journal of Economics, MIT Press, vol. 119(3), pages 1049-1090, August.
  3. Deaton, Angus & Paxson, Christina, 1994. "Intertemporal Choice and Inequality," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 437-67, June.
  4. Pendakur, Krishna, 2002. "Taking prices seriously in the measurement of inequality," Journal of Public Economics, Elsevier, vol. 86(1), pages 47-69, October.
  5. 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.
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