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Disparities in Incomes and Prices Internationally

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  • Kenneth W Clements

    (Business School, University of Western Australia)

  • Grace Gao

    (Business School, University of Western Australia)

  • Thomas Simpson

    (Business School, University of Western Australia)

Abstract

The dispersion of the distribution of relative prices in poor countries is substantially higher than that in the rich. As in 130+ countries relative prices are closely related to incomes, we develop a model that shows that the prices of luxuries (necessities) rise (fall) with income growth. This model provides a link between price dispersion and incomes that leads to several interesting concepts, including minimum-variance income and dispersion-equivalent income, the income needed to compensate for higher dispersion, which are illustrated with data from the International Comparison Program. The paper also contains an analysis of the welfare cost of higher dispersion in poorer countries.

Suggested Citation

  • Kenneth W Clements & Grace Gao & Thomas Simpson, 2012. "Disparities in Incomes and Prices Internationally," Economics Discussion / Working Papers 12-01, The University of Western Australia, Department of Economics.
    • Handle: RePEc:uwa:wpaper:12-01
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    References listed on IDEAS

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