Disparities in Incomes and Prices Internationally

The dispersion of the distribution of relative prices in poor countries is substantially higher than that in the rich. As in 130+ countries relative prices are closely related to incomes, we develop a model that shows that the prices of luxuries (necessities) rise (fall) with income growth. This model provides a link between price dispersion and incomes that leads to several interesting concepts, including minimum-variance income and dispersion-equivalent income, the income needed to compensate for higher dispersion, which are illustrated with data from the International Comparison Program. The paper also contains an analysis of the welfare cost of higher dispersion in poorer countries.