Prices, Engel Curves, and Time-Space Deflation

Abstract

Many developing countries lack spatially disaggregated price data. Some analysts use “no-price” methods by using a food Engel curve to derive the deflator as that needed for nominally similar households to have equal food shares in all regions and time periods. This method cannot be tested in countries where it is used as a spatial deflator since they lack suitable price data. In this paper, data from Vietnam are used to test this method against benchmarks provided by multilateral price indexes calculated from repeated spatial price surveys. Deflators from a food Engel curve appear to be a poor proxy for deflators obtained from multilateral price indexes. To the extent that such price indexes reliably compare real living standards over time and space, these results suggest that estimates of the level, location, and change in poverty and inequality would be distorted if the Engel method deflator was used in their stead.