Thursday, January 21, 2010

Q. What Gets Poorer the More It Gets Richer?

. Thursday, January 21, 2010

A. India.

A good lesson for social scientists: know what the measures you are using are actually measuring.

To make a long story short, the World Bank decided to boot richer India out of the group of poorest countries used to determine the poverty line, which made the poverty line higher, which made Indian (and global) poverty higher – all because India was richer. This misguided revision of the poverty line, which accounted for virtually all of the upward revision, was not clear to virtually anyone until this new paper by Deaton. ...

Then there is the “index number problem,” which only is of great fascination to 2 people, but unfortunately can change the ratio of US/Tajikstan incomes by a factor of 10. The trouble is that rich people and poor people consume very different things. For example, poor people may consume a lot of something that is cheap in the poor country, which is not consumed much and is expensive in the rich country. Similarly, rich people consume a lot of something else that is cheap in the rich country and expensive in the poor country. If you use rich country prices, you exaggerate poor people’s consumption basket value (they are given a lot of credit for consuming a lot of something very expensive, but it isn’t that expensive in the poor country and if it were, they would consume a lot less of it). Conversely, if you use poor country prices, you exaggerate rich people’s consumption basket value. There are possible intermediate solutions but no complete solutions to this intractable problem.

I don't like PPP measures for this reason: I don't think they are always measuring what they claim to measure. Which is not to say that non-PPP-adjusted measures don't have their own problems; they do. But I think that traditional GDP measures (say) lend themselves to more straightforward cross-national comparisons. Even if they aren't exactly comparing apples to apples, at least they're not comparing apples to aardvarks.


Q. What Gets Poorer the More It Gets Richer?




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