THE WATTS’ POVERTY INDEXWITH EXPLICIT PRICE VARIABILITY

We derive an explicit formula of the Watts’ poverty index, in terms of parametersof bivariate lognormal distributions of price indices and nominal livingstandards. This result enables us to: analyse the contributions of the distributionsof prices and nominal living standards in poverty; interpret the e¤ects on povertyof changes in price distributions; estimate poverty when only means and variancesof price indices and nominal living standards are known.Using data from peasants in Rwanda, we test and estimate bivariate lognormaldistributions of price indices and nominal living standards in four quarters of anagricultural year, and we calculate MLE of Watts’ indices using the model, as wellas estimates directly derived from the sampling scheme...