Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2012:2: When More Poor Means Less Poverty: On Income Inequality and Purchasing Power

Andreas Bergh () and Therese Nilsson ()
Additional contact information
Andreas Bergh: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Therese Nilsson: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: 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.

Keywords: Income Inequality; Poverty; Purchasing Power

JEL-codes: D63; I30

14 pages, January 9, 2012

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