In addition, since the reforms which are<sup>likely to have thegreatestimpactupon the poor</sup> will vary from country to country, we provide<sup>some pointersto howthe analysiscan be</sup> made more sophisticated in the areas of<sup>mostimportanceto a particular country.We</sup> conclude with a discussion of areas for<sup>futureresearch.</sup>

# **2.** A **Basic Methodology**<sup>**6**</sup>

The basic methodology draws on the<sup>approachof Nicita,Olarreaga and Soloaga(2002) in</sup> their study of the impact of trade reform<sup>inCambodia.They write the income of a</sup> household as the sum of three components:<sup>own production,wage employment and net</sup> transfers. Own production includes<sup>both the value-added from farmingas well as the</sup> value-added from any other enterprises<sup>ownedby the households(e.g.smallenterprises</sup> engaged in trading or the provision of<sup>services). Wageemployment includesall</sup> payments made by those outside the<sup>household for the labourservices of membersof the</sup> household e.g. payments for working on<sup>someoneelse's farm, or the payment resulting</sup> from a job. Net transfers refers to the<sup>net payments from the government (pensions,</sup> grants and other transfers minus any<sup>feesor taxes)as wellas net transfersfrom other</sup> households e.g. net remittances.

The idea behind the methodology is that<sup>in the short run households cannot changetheir</sup> activities in response to a change in prices<sup>(inthe long run households may well change</sup> their activities as a result of the price<sup>change-indeedthis may be the intention of the</sup> reforms). In this case income from<sup>own productionand wage employment can be written</sup> as the product of a set of prices and a<sup>set of quantities.For example,income from own</sup> production is equal to the prices of the<sup>outputs producedtimes the quantity of output</sup> produced minus the prices of the inputs<sup>used timesthequantities of inputsused.</sup> Similarly income from wage employment<sup>can be writtenas wagestimes the (net) quantity</sup> of labour sold.<sup>7</sup> If households are unable<sup>tochange their activitiesimmediately when</sup> prices change, then a first approximation<sup>to the changein their income resulting froma</sup> price shock can be given by the sum of<sup>the pricechangestirnesthe originalquantities</sup> produced. Thus if the rice price increases,<sup>a firstapproximationtothe increase in income</sup> for rice farmers is given simply by the change<sup>in therice pricetimesthe quantity of rice</sup> produced. Similarly if the wage increases,<sup>a first approximationof the benefit isgiven by</sup> the change in the wage times the quantity of<sup>labour sold.</sup> However, households consume as<sup>well as produceand price changes affect consumption</sup> too. Just as with production, price<sup>changes will changethe long run consumption pattern</sup> Work has been initiated on Ethiopia, Burundi,<sup>Nepal, Guinea,Eritrea.A draft DTIS study has also been</sup> done for Armenia and work is underway<sup>in severallow income countriesincluding:Georgia,Moldova,</sup> Kyrgyz Republic and Azerbaijan).

**6** The basic methodology is based on "A<sup>simplemethodologytoassess the poverty impact of economic</sup> policies using household data. An application<sup>toCambodia. Nicita, Olarreagaand Soloaga (2002).See</sup> Annex I for details.

7 Transfer income is harder to disaggregate<sup>in this way -seethe sectionon remittancesbelow.</sup> 3