How does household welfare vary in response to changes in food prices? Poor vs. non-poor households

Abstract

In this paper, we focus on poor households vs. non-poor households, using objective and subjective definitions of poverty. We evaluate the various responses of these households to changes in food expenditures, income, and prices, and simulate the welfare losses of food price changes across poverty definitions. We use the QUAIDS model to estimate food elasticities and rely on the National Survey of Expenditure and Household Income, from Uruguay 2016/2017, because it contains novel information on the subjective poverty status of each household. Our results show important differences across poverty definitions. In addition, we find that price increases may lead to larger welfare losses in poor households. On average, the percentage of income needed to avoid a loss in the economic welfare of poor households, defined by the objective method, is twice that required by the non-poor households, for all price changes. Differences are much smaller when using the subjective approach. Our main contribution is the first evidence of consumption behaviour and welfare analysis under different poverty measures. Our findings highlight the need for policies that mitigate the negative effects of price shocks.