Measures of Poverty
Introduction
• Absolute poverty is defined as the number of people who are unable
to command sufficient resources to satisfy basic needs
• They are counted as the total number living below a specified
minimum level of real income—an international poverty line
• International poverty line has no national boundaries and it is free
from the level of national per capita income and takes into account
differing price levels
• International poverty line measures poverty as anyone living on less
than $1.25 a day or $2 per day in PPP dollars
Various Measures
• Head Count Ratio
• Total poverty gap
• Average poverty gap
• Average income shortfall
• Normalized income shortfall
Head Count Ratio
Absolute poverty is sometimes measured by the number, or
“headcount,” H, of those whose incomes fall below the absolute
poverty line, Yp.
When the headcount is taken as a fraction of the total population, N,
we define the headcount index, H/N (also referred to as the
“headcount ratio”).
The poverty line is a standard level below which we would consider a
person to live in “absolute human misery,” such that the person’s
health is in jeopardy
Is it possible to define Minimum Health
Standard?
• Defining a minimum health standard is impossible because
technology changes over time
• For example, today we have 15-cent oral rehydration therapy packets
that can save the life of a child in Malawi
• Not long ago, the death of a child after a diarrheal disease would be taken as a sad but
inevitable part of life, whereas today we regard such a death as a catastrophic moral failure
of the international community
• We simply come as close as we can to establishing a reasonable
minimum standard that might hold over a few decades so that we
can estimate more carefully how much progress we have made on a
(more) absolute rather than a (highly) relative scale
Can one Accept International Poverty Line
without a question?
• While planning local poverty none would accept international poverty
level of $1.25 without a question
• One practical strategy for determining a local absolute poverty line is to
start by defining an adequate basket of food, based on nutritional
requirements from medical studies of required calories, protein, and
micronutrients
• Then, using local household survey data, one can identify a typical basket
of food purchased by households that just barely meet these nutritional
requirements
• One then adds other expenditures of this household, such as clothing,
shelter, and medical care, to determine the local absolute poverty line.
• Depending on how these calculations are done, the resulting poverty line
may come to more than $1.25 per day at PPP.
Head Count Ratio: Limitations
• Simply counting the number of people below an agreed-on poverty
line has serious limitations
• For example, if the poverty line is set at U.S. $450 per person, it
makes a big difference whether most of the absolute poor earn $400
or $300 per year
• Both are accorded the same weight when calculating the proportion
of the population that lies below the poverty line; clearly, however,
the poverty problem is much more serious in the latter instance
• Economists therefore attempt to calculate a total poverty gap (TPG)
Total Poverty Gap (TPG)
• The sum of the difference between the poverty line and actual
income levels of all people living below that line is TPG
• TPG measures the total amount of income necessary to raise
everyone who is below the poverty line up to that line
Illustration
• Figure 5.6 illustrates how we can measure the total poverty gap as the shaded
area between poverty line, PV, and the annual income profile of the population
• Even though in both country A and country B, 50% of the population falls below
the same poverty line, the TPG in country A is greater than in country B
• Therefore, it will take more of an effort to eliminate absolute poverty in country A
TPG: Equation
• The TPG— the extent to which the incomes of the poor lie below the
poverty line
• Can be found by adding up the amounts by which each poor person’s
income (Yi), falls below the absolute poverty line (Yp), as follows:
Average Poverty Gap (APG)
• In a simple way TPG is the amount of money per day it would take to
bring every poor person in an economy up to our defined minimum
income standards.
• On a per capita basis, the average poverty gap (APG) is found by
dividing the TPG by the total population:
Normalized Poverty Gap
• We use NPG to see how much poorer (severity) people are compared
to the poverty line on average
• Normalized poverty gap (NPG) is an income shortfall measure
NPG=APG/Yp
• This measure lies between 0 and 1 and so can be useful when we
want a unitless measure of the gap for easier comparisons
Average Income Shortfall
• It is the total poverty gap divided by the headcount of the poor:
AIS=TPG/H
• The Average Income Shortfall (AIS) tells us how much less money a
poor person has compared to the poverty line.
• We can also take the AIS and divide it by the poverty line to get
another measure called the normalized income shortfall (NIS)
NIS=AIS/Yp
