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

  • Porto, Guido G.

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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  1. 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.
  2. Eric Edmonds, 2007. "Child Labor," Working Papers id:988, eSocialSciences.
  3. Deaton, A., 1988. "Quality, Quantity, And Spatial Variation Of Price," Papers 30, World Bank - Living Standards Measurement.
  4. Deaton, A., 1990. "Price Elasticities From Surveys Data: Extensions And Indonesian Results," Papers 69, World Bank - Living Standards Measurement.
  5. Guido G. Porto, 2003. "Using survey data to assess the distributional effects of trade policy," Policy Research Working Paper Series 3137, The World Bank.
  6. 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.
  7. 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.
  8. Nicita, Alessandro, 2009. "The price effect of tariff liberalization: Measuring the impact on household welfare," Journal of Development Economics, Elsevier, vol. 89(1), pages 19-27, May.
  9. 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.
  10. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
  11. Deaton, A. & Grimard, F., 1992. "Demand Analysis and Tax Reform in Pakistan," Papers 85, World Bank - Living Standards Measurement.
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