Topic 16 poverty(i)

Measurement of Poverty:
Concepts & Measurements

Measurement of Poverty 1

Measurement of Poverty
“The governments are very keen on
amassing statistics. They collect them,
add them, raise them to the nth power
and take the cubed root and prepare
wonderful diagrams.

But you must never forget that every
one of these figures comes in the first
instance from the village watchman who
just puts down whatever he damn well
pleases.”
- Sir Josiah Stamp Measurement of Poverty 2

Measurement of Poverty Practical
Concerns

• Identification of Poverty Line
• Defining the Unit of Measurement
• Selecting the Indicator of Well-being


Identification of Poverty Lines
• The point at which the poor are separated
from the non-poor
– Relative Poverty Lines
– Absolute Poverty Lines


Absolute Poverty Lines
Type Description Features
Food Energy Intake  Based on observed  PL may vary by sub-
relation between groups of population
calorie intake and e.g. by region
total household
expenditure
Cost of Basic Needs  Identifies bundle of  Most common
goods necessary to method
meet basic needs,  Identification of
then estimates cost basic needs may not
be strghtfwd
World Bank US$1 /  US$370 / year  Eases comparison
day across countries
 Zero cost of
calculation
 Conversion to local
currency problematic


Food Energy Intake Method
• Sets PL at the level of expenditure at which FEI is
just sufficient to meet basic nutrition requirements
• STEP ONE: Establish the minimum nutrition
requirements.
• STEP TWO: Examine the observed spending pattern
to see at what average expenditure household just
achieve minimum nutrition requirement.


Food
Energy
Intake

Min Nutrition
Standard (eg 2100
cals.)

PL Expenditure
(or Income)


• The PL determined by the FEI method may
vary across regions due to differences in:
Preferences: if more expensive animal protein and
less food grain is eaten.
Relative Prices: in urban areas it may cost more to
obtain basic nutrition because food prices are higher.
Publicly Provided Goods: in capital city transport
to/from work may be cheaper than in provincial cities,
allowing for lower expenditure level to meet
minimum FEI.


• This method does take account of non-food
purchases.


Cost of Basic Needs
• PL is equal to the value of a bundle of
consumption goods necessary to meet basic
needs
May include just food (extreme poverty)
But more commonly includes non-food items


Cost of Basic Needs
• STEP ONE: Establish the minimum
consumption bundle necessary to meet basic
needs


Cost of Basic Needs
• STEP TWO: Establish the cost for the items in
the basic consumption bundle


Additional Considerations in Setting
Poverty Lines
• Regional Poverty Lines
Significant regional price differences may exist
Urban / Rural poverty lines common
• Sensitivity Analysis
Typically near mode of distribution
Multiple poverty lines often tried


Distribution of Expenditure
Mexico, 1992
0.18

0.16 Poverty Line

0.14
Population Share

0.12

0.1

0.08

0.06

0.04

0.02

0
6000
11000
16000
21000

31000
36000
41000
46000
51000
56000
61000
66000
71000
76000
81000
86000
91000
96000
10100
10600
1000

26000

Expenditure/Quarter (1984 pesos)


Cumulative Percentage of Population

10

0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9

0
1
00
60
00
11
00
0
16
00
0
21
00
0
26
00
0
31
00
0
36
00
0
41
00
0
46
00
0
51
00
0
56
00

Poverty Line
0
61
00
0
66
00
0
71
00
0
76

Expenditure/Quarter (1984 pesos)
00
0
81
00
0
Expenditure

86
00
Mexico, 1992

0
91
00
0
96
00
10 0
10
0
10 0
60
00
Cumulative Distribution of

15

Concerns



Defining the Unit of Measurement
 Household vs. Individual
 Adjusting for differences among HH
Adjusting for the age / gender of HH members
Adjusting for HH size


Defining the Unit of Measurement
• Example:
2 HH with monthly Y of $150
HH1 has 2 members…per capita Y = $75
HH2 has 3 members …per capita Y = $50
BUT:
• HH1 has 2 adult men
• HH2 has woman and 2 small children


Equivalence Scales and Economies of
Scale
• HH size is often measured in “adult
equivalent” units
each member of the HH counts as some fraction
of an adult male
Economies of scales can then be accounted for
by scaling the adult equivalent units


Equivalence Scales and Economies of
Scale
• Many different methodologies are followed
within two basic approaches
Fixed Scales
Estimated Scales


Fixed Scales
• Ex 1: Adult Equivalent Scale:
Adult Male = 1
Adult Female = 0.74
Child < 5 years = 0.6
• Ex 2: OECD Scale: AE=1+0.7*(A-1)+0.5*C
– First adult = 1
– Additional adults = 0.7
– Children < 14 = 0.5


Estimating AE Scales
• Based on examining HH data to see how
consumption varies with gender/age and size
Food share of expenditure is regressed on HH
size, HH composition


Examples of AE Estimated Scales
• Ex 1: Deaton and Meullbauer, Sri Lanka,
Indonesia
Adults = 1
Child 13-17 = 0.5
Child 7-12 = 0.3
Child < 7 = 0.2


Examples of AE Estimated Scales
• Ex 2: Deaton, India and Pakistan
– The AE value of adding another person to a HH
with 2 adults:
Age 0-4 = 0.48
Age 5-9 = 0.56
Age 10-14 = 0.60
Age 15-54 = 0.68


What is a HH?
• UN definition:
– “Group of people who eat together”
• But: how long must one be a resident to be counted
as part of a HH
– Students, migrant workers, etc.


Concerns



Selecting the Indicator of
Well-being
• Monetary Measure of Welfare
Income
Expenditure
• Non-Monetary Measures of Welfare
Direct Measures
Subjective Measures


Income
• Definition: Y = C + ∆ in net worth
• Example
Assets start of year: $10K
Spending on consumption: $3K
Assets end of year: $11K
Annual Y: $4K


Problems with Income as Welfare
Measure
• Conceptual Problems
– Goal is to measure HH ability to meet basic
needs, but Y is just one factor
• access to credit, public services, access, etc. are other
factors that determine ability to meet basic needs


Problems with Income as Welfare
Measure
• Measurement Problems
– Understating of Y
Difficult to recall all of Y, especially when Y flow is
erratic as in the informal sector
Fear of tax collector
Illegally earned Y
Separating inputs from revenue in agriculture
Accounting for own consumption of output


Expenditure
• Generally preferred to Income
– Is more direct measure of what is consumed
– Less volatile than Y
• Consumption smoothing...


Consumption Smoothing

Income
Consumption Y

C

Time


Calculating Y or Expenditure
for HH
• How do we measure Y / Expenditure?
• What is included?

• NB: HH may be both producers and
consumers


Measuring Y and Expenditure
HH as Consumer
Household
Household Y Expenditure
 Wage Y  Food expenditure
 Agricultural Y  C of own-produced food
 Non-farm self-employment  Housing expenditure
 Rent and Imputed Rent  Non-food expenditure
 Net inter-HH transfers
 Other Y


Measuring Y and Expenditure
Household as Producer

Receipts Outgoing
 Revenue from sale of output  Cash expenditure on inputs
 Own-consumption for  In-kind expenditure on inputs
produced output


Calculating Y and Expenditure
• Must not include:
Inputs into HH production, like money spent on
seeds, fertilizer
Expenditure on investment, like purchase of
tools


Calculating Y and Expenditure
• Should include:
Housing for owner-occupied dwellings
Expenditure on durable goods


Non-Monetary Measure
of Welfare
• Direct Welfare Measures
Nutrition Poverty
Health Poverty
Education Poverty


Nutrition Poverty
• Input
– Example: Calories per day

• Outcomes
– Example: Malnutrition


Health Poverty
• Outcomes
– Ex: life expectancy, infection rates
• Inputs
– Ex: vaccination rates


Education Poverty
• Outcomes
– Ex: Literacy rates
• Inputs:
– Ex: Enrolment numbers


Subjective Measures
• HH may be asked directly about their welfare
• HH may be asked to establish minimum
standards
• Community indicators may be established


Poverty Measures
• We may want to measure poverty directly
instead of looking at Y and inequality
together
• The most commonly used poverty measures
are:
Head Count Index
Poverty Gap
Proportional Poverty Gap
Squared Poverty Gap


Head Count Index
• HCI = (# poor) / (population)

• Measures the “incidence” of poverty
– i.e. it tells us “How many poor”


Head Count Index
• Simplest and most commonly used measure
• Limitations:
Does not account for depth of poverty; i.e. it
does not tell us how far below the poverty line
the poor are.
• Advantages:
Simple to understand, straightforward
interpretation.
Additive across populations.


Regional Head Count Estimates
Extreme Poverty <$275/year
Millions of
HC People
SSA: .30 120
South Asia: .29 300
ME/NA: .21 40
LA / Car: .12 50
East Asia: .09 120


Regional Head Count Estimates
Moderate Poverty < $370/year
Millions of
HC People
SSA: .48 184
South Asia: .52 532
ME/NA: .31 60
LA / Car: .22 87
East Asia: .13 182


Absolute Poverty Gap
• PG = (# Poor) * (Y shortfall)
• PG = Σ(Z-Yi) ;
– where Z is PL, Yi is income of person i
• It tells us the total Y shortfall of the poor; i.e.
the absolute amount that would be needed
to raise all the poor up to the poverty line.



Poverty Gap
Y

PL

Population
(poorest to richest)


Y Y
Poverty
Gap

PL PL

Population Population

Relatively large Relatively small
poverty gap poverty gap


Proportional Poverty Gap
• PPG = (1/N)Σ{(Z-Yi)/Z}
• Measures the “depth” of poverty
• It gives some weight to how far below the
poverty line a poor individual is
– If a poor person’s income fall, the HC won’t
change, but the PPG will increase to reflect the
increase in the depth of poverty


Squared Poverty Gap(Foster-Greere
Thorbecke)
• PPG = (1/N)Σ{(Z-Yi)/Z}2
• Measures the “severity” of poverty
• Squares the difference between the poverty
line and each household’s income
– provides much greater weight to the poorest of
the poor because the farther the HH from the
poverty line, the greater the weight it is given


Poverty Measures
• Head Count • Income Distribution
• Proportional Poverty
Gap Y
• Squared Poverty Gap
• Absolute Poverty Gap
PL

Pop (poorest to richest)


Poverty Measures
• These first 3 poverty measures are often
referred to as the Foster-Greere-Thorbecke
family of indices
• They can all be written as:
– Pα= (1/N)Σ{(Z-Yi)/Z}α
• α=0 is HC
• α=1 is PPG
• α=2 is SPG


Poverty Measures from Mexico
HC PPG SPG
1984
Rural .90 .58 .42
Urban .72 .35 .21
1989
Rural .94 .62 .61
Urban .68 .32 .39


Human Development Index
• An attempt to account for some of the
limitations of using just income or
expenditure as a measure of welfare
• Tries to take seriously some of Sen’s
arguments about capabilities
– Sen argues that the goal is to increase
capabilities …to be well fed, educated, healthy
– These capabilities won’t always be perfectly
correlated with income

Income and Capabilities
Per Capita Share of Share of
Income Poorest 40% Richest 20%
Sri Lanka 2,990 22 39
Guatemala 3,350 8 63
Life Infant Adult
Expectancy Mortality Literacy
Sri Lanka 72 18 89
Guatemala 65 48 54


HDI
• Consists of 3 elements
• Life Expectancy
– Educational Attainment
2/3 Adult Literacy
1/3 School Enrolment
– Per Capita Income
Adjusted down for Y > $5K
• Each component scored on 0 - 1 scale
• Index is simple average of 3 components


Gender Development Index
• Motivated by inequality in the distribution of
resources across gender.
• Is there evidence that resources are
distributed unequally?
• The same 3 components as HDI, but gives
weight to relative equality in Y and
achievement of capabilities by gender.


Human Poverty Index
• Attempt by UNDP to take Sen’s capability
approach even more seriously
• Index combines 3 parts:
Vulnerability to early death
Access to education
Overall standard of living
• Health, water, nutrition



The secret of truth
is that there are no facts,
only stories.

- Joao Ubaldo Ribeira
Brazilian novelist


Topic 16 poverty(i)

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