goods included in the consumption basket, as well as the sources of income. In the notation of Winters et al. (2004), the first order approximation of the welfare effect of a price change caused by a trade shock is written as:

# (1)

W represents household welfare, subscript “j” identifies a good, q stands for the household’s income generated by the sale of good j, and c is the household’s consumption of the good. The price change of good j is denoted by delta p. The summation tells us that we are summing the effects from price changes of all goods affected by the trade shock and that are consumed or sold by the household. Regardless of notation, the intuition is obvious: an increase in the price of good that is sold by the household but not consumed would result in an increase in welfare, whereas an increase in the price of a good that is not sold but is consumed would have the opposite effect.

The appeal of this simple framework for rural settings is obvious, because such households are often both producers and consumers of the same agricultural commodities. Indeed, this simple framework has been applied in World Bank studies of the effects of agricultural commodity price increases on poverty.

Two excellent examples of operational research that followed this framework are Wodon et al. (2008), which analyzed the agricultural commodity price boom of 2006-07 with African household data, and Ferreira et al. (2011), which focused on Brazil out of concern over the agricultural price boom of 2010. What makes these two examples notable is the acknowledgement of necessary caveats related to limitations of this approach. More specifically, both studies state that they are focusing only on the first order effects of the price changes and ignoring long-term considerations related to household decisions to change their consumption and income patterns. Wodon et al. (2008) in fact ignore even short run changes in income, whereas Ferreira et al. (2011) allow incomes of agricultural workers to rise proportionately with the increase in the price of agricultural commodities. That is, one study assumed that q in equation (1) would remain fixed, and the other allowed it to vary with the price changes. Neither considered changes in the structure of consumption, which might be a reasonable assumption when studying temporary price hikes.

If this were the end of the story it is very likely that most trade reforms would be pro-poor because they reduce the domestic price of imported goods. We know from household surveys that poor families tend to spend a large share of their total household expenditures on tradable goods. This is shown in Figure 1 for the case of Brazil, utilizing three different definitions of tradable goods, based on work by Lederman, Lichand and Fajnzylber (2011). The higher shares of tradables in poor households’ consumption baskets might imply that the first order impacts of most import liberalization would tend to be pro-poor, even if not necessarily supportive of inclusive growth (IG), due to the high dependence on consumption of tradable goods.

Indeed, a striking characteristic of the trade literature is the scarcity of studies that focus purely on the first-order effects of trade liberalization, which are very likely to benefit most poor consumers in developing countries. There are studies of price-policy changes, but fewer on trade policy per se. An interesting example of such a study is Duran, Finot and Lafleur (2011) of the United Nations’ Economic 4