Chapter 7: Growth, Poverty and Income Distribution
Inequality and world poverty
• Inequality is a state of being un equal
• It consider rich and poor or it wealthiest and poorest in terms of
income
• Inequality is one of the most debatable issues in the world of
economics and politics.
• Income distribution is a planned to inform us about the rich and
poor or is inform about how much discrimination exists in a
system of price rationing
• It is difficult to provide precise definition of what poverty is. Schubert
(1992) provides a universally quoted definition of poverty - the
inability to lead a well-mannered life. Some other authors understand
poverty as a state of individual or household having an income or
consumption below a certain standard, usually known as poverty line.
7.2 size and functional distribution of income
• two principal measures of income distribution for both analytical
and quantitative purposes are
the personal or size distribution of income and
the functional or distributive factor share distribution of income.
personal or size distribution of income is the measure most
commonly used by economists.
It simply deals with individual persons or households and the
total incomes they receive.
The distribution of income is according to size class of persons—
for example, the share of total income accruing to the poorest
specific percentage or the richest specific percentage of a
population— without regard to the sources of that income.
Cont….
• Economists and statisticians therefore like to arrange all
individuals by ascending personal incomes and then divide the
total population into distinct groups, or sizes.
• A common method is to divide the population into successive
quintiles (fifths) or deciles (tenths) according to ascending
income levels and then determine what proportion of the total
national income is received by each income group
• The functional distribution of income: measures the return to
different factors of production such as labour ( for which wage is
paid), capital(for which interest is paid), land(for which rent is
paid). It also involves profit which is distributed to share holders.
Measuring of inequality and absolute poverty
• The kuznet's Hypothesis
• He observes that in the early stages of economic growth
relative income inequality increases, stabilizes for a time and
then decline in the later stages.
• This is known as the inverted U- shaped hypothesis of income
distribution
• Lorenz curve is a common way of analyzing personal income
statistics.
• The more the Lorenz curve is away from the diagonal,
• The extreme case of perfect inequality is a situation in which
one person receives all of the national income while
everybody else receives nothing.
• Income inequality can also be expressed in terms of Gini
coefficient.
Gini coefficient
• The Gini Coefficient, which is derived from the Lorenz Curve,
can be used as an indicator of economic development in a country.
• Gini coefficients are aggregate inequality measures and
• It vary from o (perfect equality) to 1 (perfect inequality).
• Gini coefficients for countries with highly unequal income
distribution typically lie between 0.5 and 0.7.
• While Gini coefficients for countries with relatively equal income
distribution is lies between 0.2 to 0.5.
• The Gini coefficient of distribution is a better measure of the
degree of income inequality. It varies from 0 to 1.
• A Gini Coefficient of zero means that everyone has the same
income, while a Coefficient of 1 represents a single individual
receiving all the income.
Cont…
Measuring absolute poverty
• Absolute poverty: The situation of being unable or only barely
able to meet the subsistence essentials of food, clothing, and
shelter.
• extreme poverty generally refers to a poverty line. It's a
definition of the amount of income one needs to satisfy the most
basic needs: absolute needs (food, shelter) plus health care,
education and specific needs depending on where people live
• Absolute poverty refers to the people who are unable to access
resources by the amount which would satisfy their basic needs.
• It considers the total number of people living below a specified
minimum level of real income (an international poverty line).
•
Cont….
• Absolute poverty Absolute poverty can be viewed as the inability to secure the
minimum basic needs for human survival (World Bank, 1990).
• It is a state of existence in which the overall needs of the individual is not satisfied
due to lack of enough purchasing power or means of self-provisioning (food,
shelter, clothing, health etc.). It is a condition where deficiency is so severe that the
basic needs of life can scarcely be met at the minimum level required for survival
• Relative poverty is a state of having welfare level (measured in income or
expenditures or other wellbeing indicators) less than others. This does not
necessarily mean those people who live a life standard of below the poverty line.
• Thus, the relatively poor are those whose incomes are low compared to others even
if they secure adequate level of survival.
• Thus relative poverty is a global phenomenon reflecting the existence of inequality.
Measuring absolute poverty
• Absolute poverty may be measured by the number or “head count”, H, of those
whose income fall bellow the absolute poverty line, YP. When the head count is
taken as a function of total population, N,
• we will get the head count index =H/N.
Poverty gap
• Measures the total amount of income necessary to raise the income of those
individuals who are below the poverty line up to that line i.e. it is the gap
between the absolute poverty line and those individuals’ income who are below
it.
• The total poverty gap (TPG) or the “total income short fall” of the poor is given
as
• H
• TPG=∑ (Yp-Yi) where, yp=poverty line
• i=1 Yi= an individual’s income below the poverty line YP
• H=the number of people below the poverty line
• On a per capita basis, the average income shortfall, or average poverty gap
(APG) is given as;
• APG= TPG/H
Economic characteristics of poverty groups
• Rural Poverty
• Absolute poverty is concentrated in the rural areas i.e. the poor are
located mostly in rural areas
• Women and Poverty
• Poverty problems mostly attack women and children than men.
Women and children experience the harshest deprivation.
