based on a set of items for which both the quantity and the expenditure information is available in the HIES.

<mark>Households of different sizes and age composition have differing consumption needs and patterns. In order to reflect these differences, adjustments need to be made to the residual non-housing expenditure aggregate to reflect the age, and sometimes the gender distribution, of the household members. This is also done to account for the fact that larger households may be able to purchase goods in bulk at cheaper rates and may be able to economize on the purchase of certain items. Adjusting the non-housing expenditure aggregate using equivalence scales can address these concerns. The welfare aggregate used for poverty measurements in Pakistan is based on an adult equivalence scale which assigns a weight of 0.8 to each individual below the age of 18, and a weight of 1 to each individual age 18 and above.</mark><sup>23</sup>

**<mark>Estimating the housing affordability threshold: minimum standard for non-housing expenditures.</mark>** <mark>In the absence of readily available budget standards, poverty estimation techniques can be adapted to estimate a minimum standard for non-housing (food and non-food) expenditure. In particular, the process followed for determining the poverty line can also be used to determine a non-housing poverty line – or a threshold for spending on non-housing residual needs. This consists of basic food needs to which a provision is added for basic non-housing and non-food needs.</mark>

<mark>In the case of Pakistan, this threshold is estimated by adopting a modified CBN method. This methodology is implemented for the REM approach in two stages. In the first stage, the food poverty line was estimated, or the minimum expenditure required to fulfil basic food requirements for a particular reference group. This reflects the cost of a basic food basket that meets the minimum daily caloric requirement, using food items, quantities and prices faced by a specific reference group. In the case of Pakistan, the minimum standard has been set at 2,350 calories per adult equivalent.</mark><sup>24</sup> <mark>The first stage in the REM approach closely mirrors the CBN methodology. In the second stage, non-food and non-housing basic needs are estimated. This is indirectly accounted for by estimating the food share of the total non-housing budget, for households whose food expenditure is ‘close’ to the food poverty line. This share is used to scale up the food poverty line to obtain the basic minimum threshold of total (food and non-food) non-housing expenditures. This budget share is referred to as the</mark> _<mark>scaling factor</mark>_ <mark>and allows for scaling up the food expenditures by an amount that is more reflective of the basic non-food expenditures, outside of housing expenses. The scaling factor in the REM approach varies from the traditional CBN methodology since it represents food as a share of non-housing and non-food budget, as opposed to aggregate non-food spending by the household.</mark> Using this method has several advantages. In the absence of predetermined budget standards, this allows for the assignation of a monetary value to the normative standard of living that is deemed to be absolutely necessary in any society. Using quantities of items consumed from the survey data accounts for the composition of the basket of goods based on household preferences and consumption patterns, instead of normatively defining the minimum amount required of each food item. Second, the scaling factor is non-parametrically estimated using the food share of non-housing budget for those consuming ‘close’ to

> 23 While this method of measuring adult equivalence does not take into account the higher costs that might be incurred by households that have children, for example, in education, it is also the case that these expenditures are more applicable at higher ends of the welfare distribution. For the bottom quintile, households spend less than two percent of their budget on education, partly because public education is technically free of cost.

> 24 As defined by the Government of Pakistan’s Centre for Research on Poverty Reduction and Income Distribution (CRPRID) of the Planning Commission.

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