measurement of poverty: concepts & measurements

Measurement of Poverty:Concepts & Measurements

1Measurement of Poverty

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 2Measurement of Poverty

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 relation between calorie intake and total household expenditure

PL may vary by sub-groups of population e.g. by region

Cost of Basic Needs Identifies bundle of goods necessary to meet basic needs, then estimates cost

Most common method

Identification of basic needs may not be strghtfwd

World Bank US$1 / day

US$370 / year Eases comparison 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 MethodFood Energy Intake

Expenditure (or Income)

Min Nutrition Standard (eg 2100 cals.)

PL



• 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 LinesSignificant regional price differences may existUrban / Rural poverty lines common

• Sensitivity AnalysisTypically near mode of distributionMultiple poverty lines often tried


Distribution of ExpenditureMexico, 1992

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Poverty Line


Cumulative Distribution of Expenditure

Mexico, 1992

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Defining the Unit of Measurement

Household vs. IndividualAdjusting for differences among HH

Adjusting for the age / gender of HH membersAdjusting for HH size


Defining the Unit of Measurement

• Example:2 HH with monthly Y of $150HH1 has 2 members…per capita Y = $75HH2 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” unitseach member of the HH counts as some fraction

of an adult maleEconomies 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 approachesFixed ScalesEstimated Scales


Fixed Scales

• Ex 1: Adult Equivalent Scale:Adult Male = 1Adult Female = 0.74Child < 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 sizeFood share of expenditure is regressed on HH

size, HH composition


Examples of AE Estimated Scales

• Ex 1: Deaton and Meullbauer, Sri Lanka, IndonesiaAdults = 1Child 13-17 = 0.5Child 7-12 = 0.3Child < 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 = 0.48Age 5-9 = 0.56Age 10-14 = 0.60Age 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.


Selecting the Indicator of Well-being

• Monetary Measure of WelfareIncomeExpenditure

• Non-Monetary Measures of WelfareDirect MeasuresSubjective Measures


Income

• Definition: Y = C + in net worth• Example

Assets start of year: $10KSpending on consumption: $3KAssets end of year: $11KAnnual 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 collectorIllegally earned YSeparating inputs from revenue in agricultureAccounting 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

Time

Y

C


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 ExpenditureHH as Consumer

Household YHousehold

Expenditure

Wage Y Agricultural Y Non-farm self-employment Rent and Imputed Rent Net inter-HH transfers Other Y

Food expenditure C of own-produced food Housing expenditure Non-food expenditure


Measuring Y and ExpenditureHousehold as Producer

Receipts Outgoing

Revenue from sale of output Own-consumption for

produced output

Cash expenditure on inputs In-kind expenditure on inputs


Calculating Y and Expenditure

• Must not include:Inputs into HH production, like money spent on

seeds, fertilizerExpenditure on investment, like purchase of

tools


Calculating Y and Expenditure

• Should include:Housing for owner-occupied dwellingsExpenditure on durable goods


Non-Monetary Measure of Welfare

• Direct Welfare MeasuresNutrition PovertyHealth PovertyEducation 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 IndexPoverty GapProportional Poverty GapSquared 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

HCMillions of

PeopleSSA: .30 120South Asia: .29 300ME/NA: .21 40LA / Car: .12 50East Asia: .09 120


Regional Head Count Estimates Moderate Poverty < $370/year

HCMillions of

PeopleSSA: .48 184South Asia: .52 532ME/NA: .31 60LA / Car: .22 87East Asia: .13 182


Absolute Poverty Gap

• PG = (# Poor) * (Y shortfall) • PG = (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.



Y

Population (poorest to richest)

PL

Poverty Gap



Y

Population Population

Y

Relatively large poverty gap

Relatively small poverty gap

PL PL

Poverty Gap


Proportional Poverty Gap

• PPG = (1/N){(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){(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• Proportional Poverty

Gap• Squared Poverty Gap• Absolute Poverty Gap

• Income Distribution

PL

Y

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){(Z-Yi)/Z}

• =0 is HC• =1 is PPG• =2 is SPG


Poverty Measures from Mexico

HC PPG SPG1984 Rural .90 .58 .42 Urban .72 .35 .211989 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 Income

Share of Poorest 40%

Share of Richest 20%

Sri Lanka 2,990 22 39

Guatemala 3,350 8 63

Life Expectancy

Infant Mortality

Adult Literacy

Sri Lanka 72 18 89

Guatemala 65 48 54


HDI

• Consists of 3 elements• Life Expectancy

– Educational Attainment2/3 Adult Literacy1/3 School Enrolment

– Per Capita IncomeAdjusted 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 deathAccess to educationOverall standard of living

• Health, water, nutrition


Measurement of Poverty

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

- Joao Ubaldo Ribeira Brazilian novelist


measurement of poverty: concepts & measurements

Documents

basic consumption bundle

regioncost of basic

povertycost of basic

povertyabsolute poverty

povertycost of basic

existurban rural poverty

calorie intake

minimum consumption