A Unified Approach to Measuring Poverty and Inequality
There are various types of equivalence scales and economies of scale. Also, there are different ways of determining these scales, such as evaluating nutritional needs and behavioral needs. Differences in nutritional needs are derived from various health studies. Data on behavioral needs are obtained from econometric estimates that are based on observed commodity allocations. However, the observed allocation is suspect because what is observed may not necessarily be what is actually needed. For example, if female children are observed to consume less, does this mean that they need less, or are they just discriminated against? There is no straightforward answer to this question, unfortunately, because it is beyond the scope of most consumer expenditure surveys. Two adult equivalence (AE) scales are more commonly used than others. The first is used by the Organisation for Economic Co-operation and Development (OECD), which we denote by AEOECD. It is defined as AEOECD = 1 + 0.7(NA − 1) + 0.5NC ,
(2.1)
where NA is the number of adults in the household, and NC is the number of children in the household. This scale actually serves as both an equivalence scale and an economy of scale. Note that when there is only one adult member in the household, AEOECD = 1. For a household with two adult members, AEOECD = 1.7 (AEOECD = 2 is incorrect because two adults sharing the same household are assumed to enjoy economy of scale). For instance, if the actual total income of a two-member household is Rs 17,000, then the per capita real income of the household is equivalent to Rs 17,000/1.7 = Rs 10,000 and not Rs 8,500, as it would be in the per capita case. This is an example of adjusting for economy of scale. For a single parent household with two children, however, the actual total income of Rs 17,000 is equivalent to a per capita real income of Rs 8,500 because AEOECD = 1 + 2 × 0.5 = 2. The second adult equivalent scale is used by the Living Standards Measurement Study (LSMS), which we denote by AELSMS. It is defined as AELSMS = (NA + ϱNC)ϑ,
(2.2)
where NA is the number of adults in the household, and NC is the number of children in the household. In this scale, parameter ϱ measures the cost of a child compared to an adult. Parameter ϑ captures the effect of economy of scale. Both parameters
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