Price sensitivity as a measure of living standards in late-colonial Mexico city

Abstract

We exploit crop price data and seasonal climatic conditions, measured by tree-ring growth, to analyze food consumption in the last decades of colonial rule. We estimate the elasticity of substitution between wheat and maize —a measurement of price sensitivity that provides a demand-based approximation to living standards. The estimates place household expenditures between the two alternatives found in the literature: the Laspeyres (or fixed) basket and the least-costly (or “cheap”) basket, albeit the estimates are closer to the latter. A fixed basket would require a household to spend on average 29% more than a “cheap” basket; the average excess expenditure for our estimates is close to 2%. The results confirm the decreasing trend on living standards in the literature, and highlight the importance of household optimizing behavior in the assessment of living standards: economic pressure and necessity elicit adaptation.