Measuring Poverty

Definition Poverty occurs when resources available to a household/individual fall short of a particular minimal threshold –On the Threshold –Qualifying “resources” Poverty lines are constructed in a variety of ways and there is little consensus on how to best construct them

Poverty Lines Absolute: $1 a day, or $2 a day, often used in some development studies –Too arbitrary but comparable across countries –Depend on cross country price differences Consumption bundle based. (Russia does this) –A minimally adequate consumption bundle is identified and then priced. Food Cost based (U.S.) –First the cost of a minimal but adequate diet is derived (the thrifty food plan) –Then it is multiplied by ‘3’ (one over the share of food in the median household’s budget) Relative: 20% of the median income

Most lines are relative Consumption Bundle based: –Someone has to decide what goes in the minimally adequate consumption bundle –That choice is culture-specific Food cost based: –The minimal cost of food is multiplied by 1/s (where s is the food share for the median household) –S incorporates the consumption habits of the median unconstrained household

Measuring Resources Income or consumption? Income measures “potential” to consume Income does not depend on preferences for inter-temporal consumption It can be hard to account for “lumpy” purchases of durables Does not account for consumption smoothing Income Is sometimes understated in surveys Difficult to measure the income equivalent of household production Overall I prefer consumption as a measure of resources

Poverty Indexes: The FGT: -Continuous for those in poverty and censored at 0 -The coefficient alpha allows for ‘social norms’ on inequality to be reflected in the measures of poverty --Compute average poverty for a population of 2 people with z=10 and: --Consumption Vector [9 3] with alpha=1 and then 2 --Consumption Vector [8 4] with alpha=1 and then 2 --This will illustrate transfer sensitivity

Dynamics of Poverty Poverty over time: Chronic poverty is defined as average resources below the poverty line for multiple time periods Transient poverty is poverty in at least one time period but not necessarily chronic Persistent poverty is poverty in every single time period Examples: –[8 11 7]—chronic not persistent –[8 7 8]—chronic and persistent –[ ]—transient not chronic not persistent

Dynamics of Poverty—contd. Chronic poverty is defined as C= P(E(y)) –Where E(y)=average (y t ) For the FGT: [(z-E(y))/z] a Transient poverty is defined as P(y)-C –P(y)=average of P(y t ) Consider: a=1 z=10 and consumption vectors: –[ ] –[ ]

Examples consumptionP(yi) avg CT consumptionP(yi) avg.90.2 CT 0.1

Vulnerability Vulnerability is another way to look at poverty over time Defined as the probability of ending up in poverty in any given period Measures the extend to which households can protect themselves from negative shocks For both of the above examples the household has a 0.5 chance of living in poverty in any given period

Subjective Measures Interview based—meant to isolate feelings and experiences that are associated with poverty It is subjective, sensitive to the distribution of income even above the poverty line Could potentially capture dimensions of economic deprivation that objective poverty measures do not Both approaches need to be applied to refine our understanding of deprivation Example: U.S. Food Insecurity

The Growth Elasticity Growth elasticity of income in the first quintile of the distribution: (%change income) q=1 /(%change income) all Growth elasticity of the head count ratio Percent change in the poverty ration per one percent in per capita income growth