Poverty and Inequality

Measurement

Alkire and Santos Chapter-6

Objectives
• To gain insights about concepts of Poverty and inequality
• To learn about key measures of monetary poverty and Inequality
• To present key multi-dimensional measures of poverty
• To raise awareness of the importance of measurement tools as well as
of their underlying concepts for policy use.
Importance of Using Measurement as A tool
• Good Measures allow to compare poverty and inequality across time,
between groups, and contribute to policy design.
• One strong motivation for undertaking data analysis – support the
formulation of more effective policy.
• As human development and the capability approach move beyond
the metric of income, their measurement raises particular challenges.
Limitations
• In some places more attention is placed on poverty measurement
than causal analysis, or political response.
• Mainstream poverty research has generally failed to address the
dynamic, structural and relational factors that give rise to poverty. He
warns of the risk that poverty research depoliticizes what is
essentially a political problem.(Harris 2007)
• The technical measurement of poverty can seem to dissociate it from
the social processes of the accumulation and distribution of wealth.
(Green and Hulme (2005)
• In summary, we understand that quantitative poverty and inequality
measurement is – although important – limited. It is just one building
block of distributional analysis and policy design and implementation.
Furthermore, poverty measurement needs to be accompanied by
analyses of the social processes, structures and relationships that
create poverty (and, we might add, by practical and political action to
confront poverty). Thus while the remainder of this chapter focuses
enthusiastically on inequality and poverty measurement, it does so
fully recognizing the limitations of this task, and the need for
complementary methods both of research and of action.
Measurement of Inequality, poverty and Well-
being
Inequality
• Measures consider the entire distribution and provide a value that summarizes the
inequality between every person or household achievements

Poverty
• Measures focus on the part of the population that falls short of some minimum level,
often called the poverty line, and provide a value that summarises deprivation in that
society.

Well-being
• Measures quality of life or standard of living. Consider the entire distribution of
achievements and provide a value that summarises the level of wellbeing in the
population.
• Uni-dimensional Measures- When the measure include
only one domain usually income and consumption.
• Multidimensional- When the measure combine several
domains.
 Criticism of Using Monetary Measures.
• They assume that markets (prices) exist for all goods, and ignore the existence
of public goods and access to non-market education and health services.
• They overlook people’s differing ‘conversion factors’ between income and
functioning.
• Having a certain amount of income does not guarantee that the individual will
allocate it to the basic goods and services considered necessary to lead a non-
impoverished life (addicts)
• The indicator used is usually the total(Per-capita) household income, but
overlooks inequalities in intra-household distribution, in which some members
may receive less because of their gender, age or status in the household.
• Income data are usually deeply flawed due to missing observations and
misreporting
• Despite these disadvantages, the practical methodologies for
measuring inequality and poverty in the income spaces have been
solidly developed and provide the basis for extensions to other
dimensions and spaces
Key Properties Of Inequality Measures
• Symmetry/Anonymity- from an ethical point of view, it does not matter who is earning more and who is
earning less. A situation where person A earns 100 and B earns 200 is identical to situation in which their
income is interchanged.
• Relative/scale invariance- according to this principle inequality index should not change whenever relative
income remains same. It means if income of all persons increases by the same proportion then inequality
index will remain same.
• Population/Replication Invariance- It means that inequality index should not depend on the size of the
population. This implies that if we compare an income distribution of number of N number of individual and
another distribution of 2N umber of people with same income pattern repeated. Then there should be no
difference in inequality index.
• Dalton Tranfer Principle- according to this principle, if one income distribution can be achieved from another
income distribution by constructing a sequence of regressive transfer, then inequality index must increase.
Regressive transfer means that income is transferred from poor to rich.
• Decomposibility- This means that inequality may be broken down by population groups or income sources
or in other dimension.
Inequality measurement

Inequality Rankings
• It provides a rule for comparing Distribution.

Inequality Measures
• Apply a mathematical formula to each distribution and give a no. to measure
inequality.
 The Lorenz Criterion
• It is a graphical way to measure income inequality.
• Steps:-
1) Horizontal Axis -Arrange individuals of a population in increasing order of income
(Cummulative % of population)
2) Vertical Axis- % of national income accruing to any particular fraction of population.
3) Every point inside box represent particular combination of cumulative income and
cumulative population.
4) A perfect Equal Distribution-If every person has same income then Lorenz curve
will coincide with the line of Perfect equality.
5) A perfect Unequal Distribution- Everyone earns 0 income except for 1 person who
receives all the income
Limitations
• Although Lorenz is useful for way to describe inequality. It does not
measure extent of inequality. If one Lorenz lies uniformly below the
other then we can say that there is differ inequality, but we cannot
quantify the magnitude of that difference.
• In addition, if 2 Lorenz Curves cross each other, then Lorenz criteria is
not satisfied means that we cannot go from one income distribution
to another by a sequence of regressive transfer.
Gini Coefficient
• It is another way to measure income inequality. In this all possible pair
of income distribution are compared.
• Higher the value of Coefficient, Higher is the Inequality.
Alternate Formula

G=

N= No. of Individuals
x̄= Mean income of the distribution
Others Measures
Decile dispersion ratio (or inter-decile ratio) It is the ratio of the average income of the
richest x per cent of the population to the average income of the poorest x per cent.
Common decile ratios include:
D9/D1: ratio of the income of the 10 percent richest to that of the 10 percent poorest.
D9/D5: ratio of the income of the 10 percent richest to the income of those at the
median of the earnings distribution
D5/ D1: ratio of the income of those at the median of the earnings distribution to the 10
percent poorest
Palma ratio-It is the ratio of national income shares of the top 10 per cent of
households to the bottom 40 per cent.
20/20 ratio- It compares the ratio of the average income of the richest 20 per cent of
the population to the average income of the poorest 20 per cent of the population.
Atkinson Index
• The Atkinson index allows for varying sensitivity to inequalities in
different parts of the income distribution.
• Equally distributed equivalent (EDE) income- EDE is the per capita
income level that if assigned to all individuals produces the same
social welfare level as the actual distribution.
• It measures percentage loss in welfare due to inequality.
• The more unequal a distribution is, the lower will be the mean (that is, the EDE income)
with respect to the arithmetic mean.
• In a perfectly equal distribution, everyone receives the mean income, and inequality is
zero.
• As a distribution tends towards being perfectly unequal (with only one person tending to
accumulate all the income and the others tending to have zero), inequality tends to one.
• In the middle, ‘if A = 0.3, for example, it means that if incomes were equally distributed,
we would need only 70 per cent of the present national income to achieve the same level
of social welfare.
• His index incorporates a sensitivity parameter (ε); which can range from 0 (meaning that
the researcher is indifferent about the nature of the income distribution), to infinity
(where the researcher is concerned only with the income position of the very lowest
income group).
An intuitive interpretation of this index is possible:

Atkinson values can be used to calculate the proportion of total

income that would be required to achieve an equal level of social
welfare as at present if incomes were perfectly distributed. For
example, an Atkinson index value of 0.20 suggests that we could
achieve the same level of social welfare with only 1–0.20 = 80% of
income. The theoretical range of Atkinson values is 0 to 1, with 0
being a state of equal distribution.
General Entropy Measure.
• It also incorporates a sensitivity parameter (α) that varies in the
weight given to inequalities in differing parts of the income
spectrum.
• Typically, four GE measures are used: these are GE(–1), GE(0),
GE(1) and GE(2). The more positive α (the sensitivity parameter;
−1, 0, 1 or 2) is, the more sensitive GE(α) is to inequalities at the
top of the income distribution.
• The theoretical range of GE values is 0 to infinity, with 0 being a
state of equal distribution and values greater than 0 representing
increasing levels of inequality.
 Oxfam’s Report
• According to latest Oxfam Report on India “Survival of the Richest: The India
Supplement" reveals some stark findings proving that the gap between the rich and
the poor is indeed widening. The report also highlights how progressive tax measures
can help combat inequality in India.
• “Survival of the Richest” is published on the opening day of the 2023 World Economic
Forum in Davos, Switzerland.
Some of the key findings from the India supplement are:-

The top 1 percent in India now owns more than 40.5 percent of total wealth in 2021
while the bottom 50% of the population (700 million) has around 3 per cent of total
wealth.
Since the pandemic begun to Nov 2022, billionaires in India have seen their wealth
surge by 121%, or INR 3608 Crore per day in real terms (Around INR 2.5 crore every
minute).
The rich have done well for themselves, while the number of hungry Indians
has increased from 19 crores to 35 crores.
Income Poverty Measurements
Step-1
Identification
It needs to determine who is poor and the population is divided into 2 groups:
Poor and Non-Poor.
It asks Who is the poor?
Step -2
Aggregation
Here a poverty index is selected and it summarizes overall poverty into one
meaningful number.
It asks How poor are we?
Poverty Line
• Poverty line is a critical threshold of income, consumption
and access to goods and services below which individual
categorised as poor. Poverty line represents a minimum
level of acceptable economic participation in a given
society at a given point of time.
Identification
• Setting of Poverty Line
There are 3 types of Poverty Line

1. Absolute Poverty Lines:- It identifies minimum income level

required for all individuals regardless of the society in which we live
in, people need adequate levels of food, clothing and shelter.
It considers the absolute notion of the ability to function in a society.
However, it is very difficult to determine how much of food, cloth and
shelter is adequate. Different countries have different poverty lines.
• Absolute poverty is measured on the basis of two criteria:-

• 1. Minimum Calories Consumption Criteria

• 2. Minimum Consumption Expenditure Criteria

• 1. Minimum Calories Consumption:- People who are not getting

2400 calories per person per day in rural areas and 2100 calories in
urban area is considered to be living below poverty line.

• 2. Minimum Consumption Expenditure Criteria:- The new poverty

line, thus, translates to a monthly per capita consumption
expenditure of Rs 972 in rural areas and Rs 1,407 in urban areas in
2011-12. Or, Rs 32 in rural areas and Rs 47 in urban areas on a per
capita daily basis.
• Relative Poverty:
• Relative poverty, on the other hand, refers to a situation in which your income falls
below a certain percentage of the national median income. This means that if the
median income in your country is $100, and you are earning $60, you are considered to
be in relative poverty. The national median income changes from country to country, so
the amount of money that you need to live above the poverty line also changes.
• In most developed countries, the official poverty line is set at 50% of the median
household income. This means that if you are earning less than 50% of what the average
person in your country is earning, you are considered to be in relative poverty.

• Relative poverty is sometimes described as “relative deprivation” because the people

falling under this category are not living in total poverty. when households receive 50%
less than average household incomes. So they do have some money but still not enough
money to afford anything above the basics.
• Absolute poverty is a state of being in which a person lacks the
necessities of life, such as food, clothing, and shelter. In contrast,
relative poverty is a condition in which a person’s income is
insufficient to meet his or her needs when compared to others in
society. They are not able to enjoy same standard of living
• Hybrid of Absolute and Relative Measurement of Poverty: The
hybrid approach which would measure poverty from the perspective
of a common global standard of living and relative poverty within
countries.
• The poverty line in case of hybrid model would be equivalent to the
income required to achieve a certain welfare status, which includes
basic nutrition and social inclusion.
• Temporary Poverty- shocks can push the people temporary below the
poverty line( natural disasters, disease, poor rainfall etc.)
• Chronically poor- People experience deprivation over many years,
often over their entire lives, and frequently pass poverty on to their
children.
• Policies to deal with temporary poverty can be very different from
those required for chronic poverty.
• Households or Individual?
• Available expenditure data is often at the household level
• Should we divide total household consumption expenditures by number of
individuals in the household?
▪ This gives an idea of average or “per-capita” expenses
 Problems:
▪ Allocation of expenditures within the household are skewed ▪ Discrimination
against females and elderly (gender and age bias)
▪ Large households typically have more children, who consume less than adults
▪ Fixed costs of setting up or running a household
Do we really need a poverty Line?
• Poverty lines are always an approximation to a very “fuzzy” threshold
• Sustained deprivation can be insidious: effects are often felt at a later
point of time
• However, the poverty line gives us a starting point to study poverty
Measures of Poverty: Aggregation
• Some notation:
• y denotes income or expenditure
• Subscripts i , j,…, refer to individuals
• p denotes the poverty line, converted to a common currency
▪ For nutrition-based poverty lines, p represents the money required to
attain the minimum calorie threshold
• the mean income in the economy is m
Key properties of Poverty Measures
• There are some property that a poverty measure should satisfy:-
1. Symmetry and Replication invariance- poverty level does not depend on who is poor or on
the total size of the considered population.
2. Scale invariance - the poverty measure not to change when all incomes and the poverty line
change in the same proportion
3. Focus axiom -the poverty measure to be concerned exclusively with those who are poor.
That is, an increase in the income of a nonpoor person should not change the poverty level.
4. Monotonicity- The poverty measure to increase whenever a poor person’s income decreases.
5. Transfer property from inequality measurement is also required in poverty measurement, but
restricted to the set of the poor (we are not interested in what happens to the non-poor-so
that if there is a progressive transfer between two poor people, poverty should decrease.
6. Subgroup consistency-Demands that whenever poverty decreases
(increases) in a given subgroup of the population, and the poverty level
of all other groups remains unchanged, overall poverty should decrease
(increase).
7. Additive decomposability-Requires the overall poverty level to equal
the weighted sum of subgroup-poverty levels, where the weights are
the population shares of each subgroup.
A decomposable measure allows analysts to determine the percentage
contribution of each specific subgroup to overall poverty.
A decomposable measure is always subgroup consistent, but the
converse is not true.
Head count and Head Count Ratio
• Headcount (HC): Number of people below the poverty line, i.e., number
of individuals i such that
yi < P
• Headcount Ratio (HCR): Headcount Ratio (HCR): gives an idea of the
relative incidence of the poor or percentage of population who are poor .
HCR= HC/n
where n in the size of the population
Problems with the HC and HCR
• Fails to capture the extent to which income falls below the poverty
line.
• People near the poverty line are less poor than those far below it
• Can lead to problematic policy decisions:
▪ Policies are systematically biased in favor of individuals very close to
the poverty line, because they offer the biggest bang for the buck
(politically)
Foster-Greer-Thorbecke(FGT) indices
• This is a family of indices – Includes Headcount ratio as one of its
members.
• One advantage that other members provide better incentives for
policy makers.
• Two widely used are:-
1. Poverty Gap(FGT-1)
2. Squared Poverty Gap (FGT-2)
Poverty Gap Ratio
• The PGR is a measure of the average shortfall of income from the
poverty line. It measures depth as well as headcount Ratio
• How much extra income or consumption, on average, is required to
get ALL poor people to the poverty line?

• Division by mean income: an idea of how large the poverty gap is

relative to the resources that must be used to close the gap
 Income Gap Ratio(IGR)
• One problem with the PGR:
• In societies with high inequality (where average income is high), the
PGR looks very small even though there may be a lot of poverty

• An alternative :

• Income shortfall is divided by the total income required to bring all

poor people to the poverty line
Squared Poverty Gap(Severity
• Reflects Headcount ratio, the depth of poverty and the inequality
among the poor.
• Prioritize poorest of the poor.
Poverty Measures
FGT index
FGT class of Measures
Human Development Index
• It is called as the means of means
• Critics
• 1. The (arbitrary) selection of dimensions and indicators.
• 2. the(arbitrary) selection of weights.
• 3. the insensitiveness of human development in the population.