Deriving the relative importance of the various components of a household’s standard of living: the caseof Mexico

Abstract

This paper proposes three ways of deriving an asset index when the variables are all dichotomous. The basic idea is that households behave as if they were implicitly assigning an or-der of importance to the various assets that they may acquire. This order is based respectively on the methodologies of “Or-der of Acquisition of Durable Goods” proposed by Paroush (1963; 1965; 1973), Item Response Theory and Correspon-dence Analysis. The empirical analysis uses data from samples of the 2000 and 2010 Mexican Censuses available in the IP-UMS. It appears that the order obtained does not depend on the methodological approach adopted and was very similar in 2000 and 2010. The identification of the order of acquisition makes it possible to locate each household on the wealth scale. The cumulative frequencies are then used to propose an alternative measure of poverty. Correlations between the extreme and moderate poverty estimates officially published by CONEVAL and those obtained from the order derived are computed and it appears that the correlation coefficient with extreme poverty reaches its maximum values both in 2000 and 2010 when the poverty rate according to the order of ac-quisition is defined by the percentage of households deprived of at least two goods. The main merit of an asset approach-based on the idea of an order of acquisition is that the value of the index provides us with a clear list of the goods and services that households own or do not own and an intuitive definition of the poverty line.