| | Notwithstanding the wide recognition that movements
in relative prices and inequality affect welfare
comparisons between households, there is a dearth of
literature incorporating them in welfare analysis.
Changes in relative prices open up a divergence
between nominal and real expenditure inequalities that
will persist even if all nominal expenditures are deflated
by a household invariant price index. In a period of rising
inequality, a comparison of summary welfare measures
based on mean or median expenditure, even if inflation
adjusted, will give us a misleading picture of changes in
living standards. This paper provides evidence for India
in the post-reform period. The results confirm that in a
period of significant relative price changes and rising
inequality, the omission of these factors leads to
overstatement of the welfare gains. Another
observation is that relatively affluent states do not do all
that well if we focus on inequality or on their food
consumption alone.
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