How do consumption and living standard differ in the program?


dan royer's picture

Most people understand the difference by viewing consumption as related to total household spending (including children) and living standard as taking consumption and scaling it to "per adult," which is typically set to a 1.6.

The formula relating total household consumption and living standard per person is this:

C = S multiplied by the quantity (N + .7 K) raised to the power M. In this formula, C stands for total consumption, S for the living standard per person, N for the number of adults, K for the number of children, and M is a coefficient governing the economies of shared living. The formula is more complicated if the relative cost of kids differs by age. Our default value for M is .678071905. If there are zero kids (K=0) and N = 2, we have C = S x 1.6, i.e., 2 raised to the power .678071905 equals 1.6.
If N equals 1, then C = S. So in going from 1 adult and zero kids to 2 adults and zero kids, the consumption needed to provide the same living standard S rises from S to 1.6 times S. I.e., two can live as cheaply as 1.6. When kids are present, the ratio of C to S is no longer 1.6 when N=2. The larger is K, the small is the ratio, meaning that the degree of economies of shared living is non-linear -- it depends on family size. Bigger families enjoy more economies of shared living just like going from one person to 2 people (from N = 1 to N = 2) changes the economies of shared living (the ratio of C to S) from 1 to 1.6.

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