Cross-country demand data are often consistent with the existence of a representative consumer with homothetic preferences. While homotheticity allows the construction of tight bounds to quantity indexes and their variance, it contradicts the biological reality that humans require minimum consumption of food, clothing, and shelter. This paper presents an approach for nonparametrically estimating bounds to utility from above-subsistence consumption. OECD data are used to show that homotheticity markedly compresses the real income distribution relative to what is found under the more general class of affine-homothetic preferences, and this has major consequences for estimates of convergence.

We present theory and evidence to suggest that, in the context of analyzing global poverty, the EKS approach to estimating purchasing power parities yields more appropriate international comparison of real incomes than the Geary-Khamis approach. Our analysis of the 1996 and 2005 International Comparison Project data confirms that the Geary-Khamis approach substantially overstates the relative incomes of the world's poorest nations, and this leads to misleading comparisons of poverty across regions and over time. The EKS index of real income is much closer to being a true index of economic welfare and is therefore preferred for assessment of global poverty.