HYI Working Paper Series: Maki Atsushi
Are Luxury Goods Really Luxuries? The Validity of the Törnqvist-Wold Hypothesis (Atsushi Maki and Mlemba Abassy Kamwe)
Abstract: Contrary to Engel’s Law, we find that the Engel curve is upward sloping in the very poor households in Tanzania, indicating that the total expenditure elasticity for food in the very poor households is elastic. Food expenditure is classified as necessities because own-price elasticity for the food category as a whole is inelastic that is verified by the same cross-section data. Based on the above findings regarding the inverse U-shaped Engel curve, we consider the characteristics of necessities and luxuries utilizing not only total expenditure elasticity but own-price elasticity. This is important to target transfer payments to maintain the standard of living and support the most vulnerable population. Because of price increases in necessities, the standard of living decreases. When we have information regarding the price elasticity of demand, it is possible to fine tune subsidies and distribution of necessities to mitigate the negative impact of inflation and shortages.
Keywords: Engel’s Law, upward sloping Engel curve, Törnqvist-Wold hypothesis