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Measurements of poverty
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ECON 2213 4. Poverty and Inequality Measuring poverty To measure poverty, we first need to decide on a poverty line, such that those below it are considered poor. We can use an absolute poverty line (e.g., the World Bank’s $1 or $2 per day poverty line) or a relative poverty line (e.g., half of median income). The most common way to measure poverty is to use the poverty rate or headcount ratio: this is the share of the population below the poverty line. Measuring poverty The poverty rate is simple and easy to understand, but has weaknesses. First, the poverty rate does not indicate the depth or intensity of poverty, i.e., how far below the poverty line poor people are. Second, the poverty rate does not change if people below the poverty line become poorer. These weaknesses are addressed with the poverty gap. This adds up the extent to which individuals on average fall below the poverty line and expresses it as a percentage of the poverty line. Measuring poverty The squared poverty gap (or poverty severity index) takes into account inequality among the poor. This is a weighted sum of poverty gaps, where the weights are the poverty gaps themselves (e.g., a poverty gap of 10% of the poverty line gets a weight of 10%, a poverty gap of 50% of the poverty line gets a weight of 50%, etc.), thereby putting more weight on individuals who are far below the poverty line. Measuring poverty In Canada, we measure poverty based on a person’s or household’s income. In low-income countries, it may be better to measure poverty based on consumption, as consumption may be more accurately measured, and many workers may receive in-kind income (e.g., food). Other measures of well-being can be used, such as the Human Development Index, education, life expectancy, infant mortality, or Sen’s “capabilities” approach. Measuring inequality The Gini coefficient or Gini index is the most common measure of inequality. The Gini coefficient is a number between 0 (perfect equality) and 1 (perfect inequality). A Gini is based on a Lorenz curve, which shows how much of a country’s income is received by various percentages of the population; Gini is the ratio of the area between the line of complete equality and the Lorenz curve to the area of the triangle between the line of complete equality and the axes. The formula for the Gini index is: Measuring inequality Other ways to measure inequality include the range (top earner minus bottom earner), the ratio (top earner divided by bottom earner), the coefficient of variation (standard deviation divided by mean), and the Theil index, which is one of a set of generalized entropy measures. The Theil index has a strong advantage over the Gini, as it is decomposable into between-group and within-group inequality. The formula for the Theil T index is: Measuring inequality Inequality can be measured: Within a household. Between households. Within a village. Between villages. Within ...
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