Poverty Flashcards
Please give some reasons why food only constitutes about ½ to ¾ of the total
consumption expenditure for the extremely poor people in the world.
In the article “tidsdiskonering”. There is a global effect that also poor people save up for entertainment, events and gadgets, which will make them skip some meals for it. The need to spend on enterteinment rather than on more/better food is probably a network effect. Also culture can affect this elasticity, ex with George from Ghana there needed to work two years in Denmark before he had enough money to throw a big enough party at home, making him look succesful in their culture.
Please give some reasons why the extremely poor people in the world are often
involved in many occupations.
- They have few skills, little capital and there are rigidities and information problems in local labor markets. Thus, being a small-scale entrepeneur is easier than finding a new job.
They can not raise the capital necessary to run fulltime business (specialize).
Risk spreading is difficult, because of missing credits institutions and lumpy incomes.
Please explain the referencing problem in theoretical poverty analyses and explain
how the referencing is “solved” in practice using the cost-of-basic-needs method.
Reference problemet beskriver det der undersøges her i artikelen Ravallion (1998). Der undersøges om det er et universalt niveau af forbrug på mad, et specielt antal af kalorier et individ får er et mål for om man er fattig eller ikke fattig. Som et mål for “wellbieng”. Men problemet opstår, når vi tænker over, at fattige og rige vægter nytten af bedre kalorier forskelligt. Fattige kan få stor gavn af flere bedre kalorier, hvorimod rige ikke for den store gavn af dette problem. Derfor når vi løser det undersøger vi min. problemet bibetingelse, st u(q,x)=u
Please explain the identification problem in theoretical poverty analyses and
explain how the problem is “solved” in practice in most poverty measurements
developing countries.
- Identifikationsproblemet describes, that it is hard to adjust for household composition (sammensætning) when setting a poverty line. Poverty comparisons are based on individuals, but data (Ravallion 1998) in this case is at the household level. Thus, we need to move from the household level to individual level. This is the identification problem.
This is not easy because
1. We know very little about intra-household allocations
2. Children typically consume less than adults
3. Households have economies of scale in consumption
In many countries the problem is solved using “equivalence scales” (e.g., 1 + 0.7*(adults-1) + 0.5*children or sqrt(household size)) In most developing countries we simply divide total household expenditure by the number of people in the household thereby obtaining per capita expenditure. In other words, some countries use equivalence scales to account for this, where the number of adults and children are transformed to give a number of “effective adults” by which household consumption can be divided.
Explain the concepts strongly relative versus weakly relative poverty lines and
describe the problems with each respective measure. Outline a possible solution to
the problems.
Strongly Relative Poverty Lines:
In this case people live in poverty if their income is a constant proportion of the median income. We do not include the absolute poverty line in this meassure.
It is not clear if strong relative poverty line is a plausible comparison of income, due to that the poverty line solely adjusts to changes in the distibution of relative incomes. If all income grew with the same rate then noting would change. So, even though everyone is better off in absolute terms, the relative measure of poverty doesn’t show any reduction in the poverty rate. This is because the measure is tied to how income is distributed relative to the median, not just to overall income growth. If all income levels grow at the same rate, then the poverty measure will remain unchanged when the poverty line is set at a constant proportion of the median.
Weakly relative poverty
Weakly relative poverty lines as a way to measure poverty that takes into account both absolute and relative aspects of poverty. The formula given is:
z^R=z^A+β(m−z^A)
Here’s what each symbol represents:
○ z^R is the weakly relative poverty line.
○ z^A is the absolute poverty line.
○ β is a parameter that determines the extent to which the poverty line is relative.
○ m represents the mean or median income of the society.
The parameter β lies between 0 and 1. If β is closer to 0, the poverty line is mostly absolute and does not change much with changes in the mean or median income. Therefore not relative at all. But if β is closer to 1, the poverty line is more sensitive to changes in the mean or median income, making it more relative. The poverty line will increase as the median income increases, but not as drastically as the increase in income itself. So an increase in the median income will not increase the poverty line as a precentage of the income as it was the case in strong relative povertyline. Instead it will catch some of the increase depending on the eleasticity of the poverty line (β).
We face a problem that we do not know how plausible it is to use the strong relative poverty line when comparing income, so we might use weakly poverty line instead. Again, we face the problem if the absolute poverty line is higher then the median income, which would make our relative term collapse. Economist have tried to fix this problem, with introducing social inclusion, but the data is vague
Please give 5 characteristics of the world’s poor people (a global poverty profile).
A global poverty profile is sketched in PRLB. Five characteristics are emphasized:
- Poverty is rural: Rural poverty is higher than urban—and the rural population is larger than
the urban - Poor people are primarily engaged in agriculture and associated activities
- People with no, or low, education have much higher poverty rates than people with more
education—and the population with no and low education is large - Ethnic minorities and indigenous people have very high poverty rates in Latin America and
Asia—but the populations are often small
Please explain why global poverty is measured by the PPP $1.90-a-day line and describe,
briefly, how it was constructed
This is explained in Ravallion (1998) and Allen (2017).
All countries with World Bank type household surveys have their own national poverty line, based on the cost of basic needs (CBN), expressed in the national currencies. PPP conversion factors for a wide range of countries makes comparisons of poverty possible. Such comparisons show that national poverty lines do not collapse to a single line, even when using the PPP-dollar. Hence, poverty measurements are not consistent across countries. World Bank economists (Ravallion, Chen and Sangraula) have estimated “global poverty lines” using 2005-PPP data and poverty lines from 75 developing
countries. A $1.25 per day poverty line is the average poverty line for the 15 poorest countries in the sample. Hence, it represents extreme poverty across countries. The poverty lines of the 15
countries in their own currencies were raised with national price indices to 2011 values and then converted to US dollars with PPP exchange rates computed from the 2011 round of the International Comparison Program (ICP2011) price data. The average came to US$1.88, which
was rounded up to give the $1.90-a-day line.
Note
Describe PPP
An average of
The actual numbers
Extreme poverty
Please explain how Robert Allen estimates global least cost food poverty lines?
Robert Allen’s approach to estimating global least cost food poverty lines involves using linear programming to find the minimum amount of money needed to meet basic nutritional requirements based on local diets and prices. This method involves calculating the lowest possible cost to achieve a nutritionally adequate diet that satisfies several essential dietary criteria, such as:
Caloric intake – ensuring sufficient energy is available from the diet.
Proteins and fats – meeting the necessary levels of protein and fats for healthy bodily functions.
Micronutrients – securing essential vitamins and minerals.
The calculated minimum expenditure for achieving these nutritional needs in various locales then serves as the basis for establishing country-specific food poverty lines. These poverty lines are adjusted using purchasing power parity (PPP) to reflect costs accurately across different economies and currencies.
What is the Purchasing Power Parity (PPP) and what is the application in Allen´s method of global least food poverty lines
The PPP is a way of converting local prices into US$, which make the comparable with other countries. It considers how much it cost for an individual to consume “a basket of goods” in their country and compare that to other countries cost of “a basket of goods”. In this way we include the purchasing power, so we can understand the relative cost, instead of just using the countries exchange rate to US$.
example with exchange rate and PPP
Application in Allen’s Method
In the context of Allen’s methodology, using PPP allows translating the local prices of foods needed to meet nutritional standards into a common currency that reflects true buying power internationally. This standardization using PPP-adjusted international dollars enables meaningful comparisons of poverty thresholds between countries, acknowledging that the same amount of money buys different quantities of food in different countries. Thus, Allen’s food poverty lines provide a globally standardized measure of the minimum income necessary to afford a nutritionally adequate diet, reflecting local dietary customs and prices.
Please give an overview of why inequality is considered to be important for development. Inequality matters for poverty.
Keeping the average income level constant (i.e. in the absence of economic growth), an increase in inequality will result in an increase in poverty. When some people get richer, but the average income level stays the same, that would mean that other people would need to get poorer. Likewise, if economic inequality is constant
and the average income level increases, poverty will decline.
Here you could also talk about strong relative and weakly relative poverty lines.
Those at the bottom of the global income distribution live in absolute poverty. Please discuss some
stylized facts about how the poor tend to spend their money – and discuss potential causes for
these spending patterns.
This question refers to Banerjee and Duflo (2007).3 The stylized facts about how the poor presented in
this paper include:’
The poor do not put all their money towards food. Of the money spent on food, the poor do not tend to
maximize calories, but rather spend money on better quality, instead of simply focusing on caloric
quantity. Banerjee and Duflo (BD) argue that this shows that the poor do not see additional calories as
the only necessary item to spend their limited income on. BD also argue that additional nutrition may
not help the poor much in terms of increasing their productivity.
A relatively large share of spending on luxury goods such as alcohol, tobacco and festivals and other
social events. On the contrary, the poor spend very little on other types of entertainment such as movies
or, in some countries, television ownership. BD hypothesize that festivals etc. may have crowded out
other forms of entertainment – or perhaps these modern types of entertainment are simply not
available or it is not feasible to save for e.g. purchasing a television,
The poor save little. BD propose several hypotheses for this stylized fact, namely that the poor lack a
safe place to put their savings and that savings from home can be stolen, or that the poor can easily be
tempted to spend their savings if they do start saving.
The poor invest little in education. BD argue that the children of the poor are to a large extent primary
school (which is free in most of the developing world). They also argue that it may not be obvious to parents that the quality of the free primary schooling provided is often not good. Therefore, the poor do
not prioritize sending their children to better and more expensive schools.
Please state and briefly explain two channels through which climate change may have adverse
impacts on poverty rates.
This question draws on Hallegatte & Rozenberg (2017).
Hallegatte & Rozenberg (2017) discuss five channels. The student should state and briefly explain at least
two of these five channels:
Agricultural productivity and prices: Many poor people are farmers, and a reduction in agricultural productivity or an increase in the input price may increase the number of poor people.
Food prices: Poor people are also consumers of food items, and reduced agricultural productivity can lead to increased food prices, which leads to lower real wages, thus increasing poverty.
Natural disasters: Climate change can increase the frequency and severity of natural disasters. The impact on the poverty rate depends on the extent to which those who are near the poverty
line live in disaster-prone areas.
Labour productivity: Increased temperatures reduce labour productivity. This reduces real
wages, and can in this way increase the poverty rate.
Health impacts: Climate change can affect health through several channels including malarial incidence, stunting and diarrheal disease. These impacts lead to increased treatment costs as
well as a drop in labor supply.
Please give a brief overview of how climate change may affect agriculture and how this in turn can
affect poverty.
This question is related to PRLB ch. 16 and 20 and Hallegatte and Rosenberg (2017).
Climate change can impact agricultural productivity. The two primary channels through which climate
change affects agriculture are higher average temperatures and changes in rainfall. There are regional
differences in how agricultural productivity will be affected. The local effects depend on, among other
things, which crops are grown and how temperature and rainfall changes. The effects also depend on
which adaptation measures that are taken.
Agricultural growth has been found to be an effective tool for poverty reduction. Therefore, reductions in
agricultural productivity due to climate change may have adverse impacts on poverty.
Hallegatte and Rosenberg (2017) estimate the effects of climate change on poverty through five channels,
where two of the channels are related to agriculture, namely the effect on income for farmers and the
effect on food prices for consumers. A decrease in agricultural productivity will reduce income for farmers.
A reduction in food output will increase prices, which hurts consumers. The authors find that these two
channels can increase the number of people below the poverty line. The agricultural channels have the
largest potential impact on poverty of the five channels examined by the authors.
Please explain briefly how poverty is estimated using the Food Energy Intake (FEI) method of
estimating poverty lines.
This question draws on Ravallion (1998).
The food energy intake method (FEI) uses an “engel curve for calories”, i.e., a function fitted to data that
describes how food-energy intake measured in calories per day depends on income (or expenditure).
This is combined with a nutritional anchor, i.e., the number of calories per day required to be considered
non-poor. The poverty line is determined as the income level at which the nutritional anchor is achieved using the
fitted function.
Please briefly discuss some disadvantages of the Food Energy Intake (FEI) method.
This question draws on Ravallion (1998).
The cost of acquiring the nutritional anchor will vary with tastes, prices and which goods are publicly
provided. One example is that urban non-food prices are often lower than rural non-food prices, which,
due to substitution effects in consumption, leads to a higher FEI poverty line, since urban households
purchase more non-food items before they reach the nutritional anchor.
