Angus Deaton Wins The 2015 Nobel Prize In Economics

From the New York Times Nobel in Economics Given to Angus Deaton for Studies of Consumption.

From Marginal Revolution Angus Deaton wins the Nobel.

From the Washington Post Why trying to help poor countries might actually hurt them.

Here is an excerpt from Marginal Revolution:

"Angus Deaton of Princeton University wins the Nobel prize. Working with the World Bank, Deaton has played a huge role in expanding data in developing countries. When you read that world poverty has fallen below 10% for the first time ever and you want to know how we know— the answer is Deaton’s work on household surveys, data collection and welfare measurement. I see Deaton’s major contribution as understanding and measuring world poverty.

Measuring welfare sounds simple but doing it right isn’t easy. How do you compare the standard of living in two different countries? Suppose you simply convert incomes using exchange rates. Sorry, that doesn’t work. Not all goods are traded so exchange rates tend to reflect the prices of tradable goods but a large share of consumption is on hard-to-trade services. The Balassa-Samuelson effect tells us that services will tend to be cheaper in poorer countries (I always get a haircut when in a poor country but I don’t expect to get a great deal on electronics). As a result, comparing standards of living using exchange rates will suggest that developing countries are poorer than they actually are. A second problem is the cheese problem. Americans consume a lot of cheese, the Chinese don’t. Is this because the Chinese are too poor to consume cheese or because tastes differ? How you answer this question makes a difference for understanding welfare. A third problem is the warring supermarkets problem. Two supermarkets each claim that they have the lowest prices and they are both right! How is this possible? Consumers at supermarket A buy more of what is cheap at A and less of what is expensive at A and vice-versa for B. Thus, it would cost more to buy the A basket at store B and it would also cost more to buy the B basket at store A! So which supermarket is better? Comparing standards of living across countries isn’t easy and then you want to make these comparisons consistently over time as well! Deaton, working especially with the World Bank, helped to construct price indices for all countries that measure goods and services and he showed how to use these to make theoretically appropriate comparisons of welfare."