26/09/2023

CHAPTER 3:
HOUSEHOLD

LECTURER: NGUYEN THI HAO, PH.D.

PHONE: 0949230527

EMAIL: HAONGUYEN@VNU.EDU.VN

CONTENTS

1. Diversity in Development and Policy Analysis

2. Unitary Household Theories
3. Non-unitary Household Theories

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1. DIVERSITY IN DEVELOPMENT
AND POLICY ANALYSIS

• People are diverse

• Diverse people experience differentiated impacts of
development policies
• Complete picture of a policy’s impacts requires to exam
both direct effects and indirect effects (spillover)

DIRECT EFFECTS

• Direct effects: effects on the people whose lives are touched

most obviously and immediately.
• Example:
• Policies raise the price of corn: Direct Effects: raise incomes for
farming households that sell corn and to reduce the purchasing
power of households that buy corn.
• Policy raises school quality: Direct effects: raise the value of
education for families who live near schools and can afford to send
children to school, while bypassing many remote and poor families.

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INDIRECT (SPILLOVER) EFFECTS

• Indirect effects: Occurring later in time or are farther removed in

distance, but are still reasonably foreseeable
• Depending on the people choosing to act on the information and
change their behavior.
• Example:
• Agricultural extension policy support farmers to apply new technology to
improve productivity and income. The farmers might also increase their
demand in rural labor and increase their supply to food markets. Indirect effects
of agricultural extension policy might raise wages and lower food prices,
indirectly raising well-being for landless rural laborers and urban consumers.

ANALYTICAL TOOLS

• Analytical tools: models of household decision making

• across households
• within households (women vs men)
• Static models (mô hình tĩnh): timeless (ignoring any
possible connections between present choices and
future circumstances)

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2. UNITARY HOUSEHOLD THEORIES

• Unitary household models, entire household was

treated as it were a single or unitary decision maker,
maximizing a single utility function.

DISCUSSION

• Point of view: “High global food

prices are good for the world’s poor
who are mainly profit from
agricultural actives.”
• Do you agree? Explain?

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2. UNITARY HOUSEHOLD THEORIES

Motivation:
• Historical point of view: Higher global food prices as
good for the world’s poor.
• Empirical evidence: Global food price crisis in 2008
indicated that high global food prices are bad for the
world’s poor.

2. UNITARY HOUSEHOLD THEORIES

Question arises
• How do we make sense of the apparent contradiction between
these two views?
• What do we learn from the events of 2008 about the likely impacts
on the world’s poor of agricultural market liberalization in the
developed countries?
• What empirical evidence should we gather to understand better
the link between global food prices and global poverty?
 The household models discussed provide a useful framework
for analyzing such questions.

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2. UNITARY HOUSEHOLD THEORIES

Four categories of households:

• Wage labor households
• Farm households
• Nonfarm business households
• Incapacitated households

2.1. WAGE LABOR HOUSEHOLDS

• Wage labor households: wage are the main source of income

• Wage labor households are diverse
• They functions simultaneously as both labor suppliers and
consumers

• Notation:

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2.1. WAGE LABOR HOUSEHOLDS

As a labor suppliers:
• T: total time available (after accounting for sleep and other
life-sustaining activities)
• S: labor supply time
• H: home time
• The total time constraint:
S + H ≤T (1)

2.1. WAGE LABOR HOUSEHOLDS

As a consumers:
• w: wage per hour of labor supplied
• F: Food consumption,
• N: Nonfodd consumption
• pf and pn: price per-unit of F and N
• M: nonlabor income

• Budget constraint:
pfF + pnN ≤ M + wS (2)

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2.1. WAGE LABOR HOUSEHOLDS

Household’s utility function: U(F, N, H)

• Household maximizes their utility
• Subject to the constraints (1) & (2)
• Consumer choice model
pfF + pnN + wH = M + wT
• Right side: full income (market value of its time and nonlabor income
endowments)
• Left side: three goods buys with its full income: F, N, and enjoyment of
hometime

IMPACT OF ENDOWMENT, PRICE, AND

WAGE CHANGES ON BEHAVIOR

pfF + pnN + wH = M + wT

• Increases in M (other constant, f F, N, and H are all normal goods)

household to consume more of F, N, and H (reduced labor
supply).
• Increase in pf (holding w, M, and pn constant)  reduces F
• might cause H to rise, fall, or remain constant, depending on whether food
and home time are substitutes, complements, or independent in
consumption.
• Increase w: ambiguous effects to H and S

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PURCHASING POWER IMPACTS

OF FOODS PRICE INCREASE

• Increase food price (m, other price constant)

•  Reduce purchasing power or real income  Reduce household’s well-
being
• For poor households: Effects may be large (they spend a large fraction of
their income on food)

•  households must respond to satisfy their budget constraint 

Reducing expenditure (reduce F, N or H)
• ρ: percentage increase in the price of food
• f is the fraction of income on food
 purchasing power reduces = ρf %

PURCHASING POWER IMPACTS OF SIMULTANEOUS

INCREASE IN FOOD PRICE AND WAGES

• Quantify net change in household’s purchasing power when both

food price and wage rise.
Food price change: 𝑝 to 𝑝  expenditure rise = (𝑝 - 𝑝 )F
Reducing household’s purchasing power

• Wage labour household lives in a rural economy

• increased food prices  expand agricultural production and employment
 caused wage to rise
• Wage change: from 𝑤 to 𝑤  income rise = 𝑤 − 𝑤 𝑆
Rising purchasing power

• Purchasing power rises or falls depends on the relative sizes

of the two effects

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PURCHASING POWER IMPACTS OF SIMULTANEOUS

INCREASE IN FOOD PRICE AND WAGES

• Net change in purchasing power:

• ρ: percentage increase in the price of food
• f is the fraction of income on food
 Expenditure required to maintain initial consumption rise by pf percent

• ω: fraction of its income from wage labor

• ε: elastic of wage with respect to the price of food: Each % point of increase in
the food price gives rise to an increase of ε% point in wage
 Income earned given its initial labor supply rise: pεω percent

• Net change in purchasing power = pf - pεω

= ρ(f – εω)
• The household’s purchasing power rises or falls depending
on whether εω is greater or less than f .

PURCHASING POWER IMPACTS OF SIMULTANEOUS

INCREASE IN FOOD PRICE AND WAGES

• Implications:
The net effect on purchasing power of a food price and wage increase can differ
greatly across wage labor households.

• Example: Consider an increase in the price of wheat

• For some wage labor households, wheat takes up a large fraction of the
household’s typical expenditure
• For other wage labor households, wheat takes up only a small fraction of typical
expenditures, the wage rises rapidly in response to the wheat price increase, and
wages are an important source of household

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DISCUSSION
1. What would happen to a wage labor household’s consumption
choices if pf , pn, M, and w all rose by the same percentage?
2. Consider the model of decision making by a wage labor household.
a) Which variable within that model increases if the household
receives a cash transfer from a government program?
b) What does the model tell us about the likely impact of this
change on the household’s consumption of food, nonfood, and
home time and its labor supply?
c) Assuming that home time is a normal good, what happens to
the household’s actual labor income?
d) Does the cash transfer translate peso for peso into increases in
household consumption expenditure?
e) If we find evidence that cash transfers reduce labor supply and
thus raise total income by much less than the size of the
transfer, must we interpret this as a policy failure?

2.2. FARM HOUSEHOLDS

• Farm households around the world are diverse. (owning land,

source of income,…)

• Farm households face choices about market participation.

• both produce and consume food
• both supply and demand labor
• Subsistence farm households: rarely engage in any market, cultivating their
own farms & consuming what they produce.

• Set up a simple model of farm household decision making to

analyze how the well-being of diverse farm households is affected
by changes in market prices,

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2.2. FARM HOUSEHOLDS

Net marketed surplus and net market labor supply

• Net marketed surplus (NMS) of food as: NMS = Q - F

Q: the quantity of a crop called “food” that the farm produces,
F represent the household’s consumption of food
• NMS > 0 : household sells food in the market
• NMS < 0 : household buys food

• Net market labor supply (NLS) as: NLS = S - L

L: the total quantity of labor the household employs in cultivating its farm
(including both family and hired labor)
S: the total quantity of labor the household supplies to any kind of work
• NLS > 0: some family labor is hired out
• NLS < 0: nonfamily labor is hired in

2.2. FARM HOUSEHOLDS

Endowments, constraints, and choices when participation in
markets is costless

• As a producer:
• Farm household is endowed with land, fixed factors of production, and a
technology for agricultural production
• L: labor
• i purchased input (such as chemical fertilizer)
• Production function: Q = b(L, i) (3)

• As a labor supplier: equation (1)

• As a consumer: F, N and budget constraint

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2.2. FARM HOUSEHOLDS

Endowments, constraints, and choices when participation in
markets is costless

As a consumer: F, N and budget constraint

• Assumption for budget constraint

• No cost to participate in markets
• The price of food is pf = buying = selling food
• pn, q, and w are the prices of nonfood, purchased inputs, and wage

• consider a household that produces Q units of food and

consumes F units of food, with Q>F,
• sells: Q − F units of food in the market
• add pf(Q − F) to the household budget.

2.2. FARM HOUSEHOLDS

Endowments, constraints, and choices when participation in
markets is costless

As a consumer: F, N and budget constraint

• pf: the (buying or selling) prices of food
• q: input prices, i: quantity of purchased farm input
• w: labor prices (whether the household is buying or selling)
• Budget constraint:
pfF + pnN ≤ M + wS + (pfQ – wL – qi) (4)

Household buys everything it consumes and sells everything it produces,

even when in fact it consumes some of what it produces and devotes
some of the labor it supplies to the family farm.

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2.2. FARM HOUSEHOLDS

Endowments, constraints, and choices when participation in
markets is costless

Maximize utility U(F, N, H)

Constraints (1), (3), (4)
=>pfF + pnN + wH ≤ M + wT + [pfb(L, I) – wL – qi]
Farm profits
• Choose L* and I* to maximize farm profits

-> maximize full income

pfF + pnN + wH ≤ M + wT + [pfb(L*, I*) – wL* – qi*]

2.2. FARM HOUSEHOLDS

Impacts of endowment, price, and wage changes on behavior
when participation in markets is costless

• Potential impacts on farm household behavior of changes

in endowments, prices, and wages in two steps.
First: impacts on farm production decisions,
Then: impacts on household consumption and time allocation
decisions
• Eg:
• An increase in the price of purchased inputs q, How this effects
farm decision on production, consumption and time allocation?

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2.2. FARM HOUSEHOLDS

Effects on farm household purchasing power of changes in prices
and wages

• Food price increase: 𝑝 to 𝑝 & Q = constant

• Farm revenue increases = (𝑝 – 𝑝 )Q
• Cost to maintain initial consumption levels = (𝑝 – 𝑝 ) F

• Net purchasing power:

(𝑝 – 𝑝 ) Q – (𝑝 – 𝑝 )F = (𝑝 – 𝑝 ) NMS
• NMS > 0: prices increase boosts PP
• NMS < 0: prices increase reduces PP

2.2. FARM HOUSEHOLDS

Effects on farm household purchasing power of changes in prices
and wages

• 𝑤 increases to 𝑤 & Q = constant

• Income from labor rises = (𝑤 – 𝑤 )S
• Profit from farm production falls = (𝑤 – 𝑤 )L

• Net purchasing power:

(𝑤 – 𝑤 )S – (𝑤 – 𝑤 )L = (𝑤 – 𝑤 ) NLS
• NLS > 0: wage increase boosts PP
• NLS < 0: wage increase reduces PP

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2.2. FARM HOUSEHOLDS

Transfer costs and nonparticipation in markets

• Farm households have a choice to participate in market for food

and labor, however in developing countries, many farm households
choose not to participate in at least on relevant markets.

• What kinds of transfer costs that farm households incur

when they undertakes a market transaction?

2.2. FARM HOUSEHOLDS

Transfer costs and nonparticipation in markets

• Participating in markets is costly

• Transfer costs:
• transportation costs: the costs of carrying goods/workers
between the farm and the market center
• transaction costs: the costs of identifying buyers and sellers and
reaching agreements regarding transactions

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2.2. FARM HOUSEHOLDS

Simple model with transfer costs

• Consider a farm household that produces only a cash

crop and consumes only food
• Labor market participation is costly
• 𝑡 : per-day transfer cost of hiring in nonfamily
=> cost = w + ti
• 𝑡 : per-day transfer cost of hiring out family
=> net wage = w – 𝑡

2.2. FARM HOUSEHOLDS

Simple model with transfer costs

• Production quantity Q, price p

• L: the only variable input
• Total quantity of family labor S

If L > S: employ more labors => cost = (w + 𝑡𝑖 )(L – S)

 If L < S: supply more labor => earnings = (w – 𝑡𝑜 )(S – L)

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2.2. FARM HOUSEHOLDS

Simple model with transfer costs

• Let p =one peso/unit (monetary unit)

• Assume: household seeks to maximize its utility U(F,H) -
function only of food consumption F and home time H
• Household’s budget constraint:
F = pQ + (w – t0)(S – L)
F = pQ – (w + ti)(L – S)

2.3. NONFARM BUSINESS

HOUSEHOLDS
• Similar to the farm household model
• Net sellers in output markets
• Benefit from goods price or wage increases
depending on whether they are net sellers or net
buyers of labor

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2.4. INCAPACITATED
HOUSEHOLDS
• Special cases of wage labor households
• Total time endowments are very small or who
face only very low wages
• Live almost entirely off nonlabor income

GROUP DISCUSSION

• Group 1: Present the trend of global food prices?

• Group 2: Why is the cost of food prices rising?
• Group 3: Poverty impacts of rising global food prices?
• Group 4: High food prices to be a driver of poverty reduction
• Group 5: What data should we gather to understand better
the link between global food prices and global poverty?

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