Poverty and Inequality P1: Measurement, Concepts, and Theory Flashcards
Chp 2, Bourguignon & Morrison (2002), Chen &Ravallion (2010), Haushofer & Fehr (2014) Besley & Kanbur (1990), Ravallion (2013),Haushofer & Shapiro (2013), Dutta et al. (2012), Lawry(2017), Ozler (2017)
Why Care about Poverty?
- Poverty and Human wellfare
- Distributive justice
- Bad for growth and development
Extreme Poverty: influences risk and time prefernces
Negative correlation life satisfaction
Study
Haushofer and Fern (2014)
Takewaways
Rural Kenya.
- Happiness: Statistically increased happiness cash transfers (significance) (but little difference between $400 and $1500
- Cortisol levels (Stress): People $1500 less stressed, $400 little less stress, nothing → lots of stress.
How is Extreme Poverty defined
For different types of countries (from the World bank)
World Bank’s Estimation for Poverty Line:
(1) Low Income Countries: $2.15/day in PPP dollars
(2) Lower-Middle Income Countries: $3.65 PPP /day
(3) Upper-Middle Income Countries: $6.85 PPP /day
Setting poverty line:
- Cheapest way acheive (1) caloric requirement and ((2) basic needs
- Nominal value changes → not real
Downwards trend in extreme poverty leading up to Covid-19
Define the Poverty Line?
Poverty Line: (z) Calculating cheapest basket necessary baseline calories (using PPP)
- Local Poverty Assessments: Survey populations in developing countries
- **Calorie Counting: ** Determine minimum cost of 2,000 calories (Used World Bank, using PPP)
Measuring Poverty
What is the Head Count Index and Ratio?
Poverty Headcount: #ppl given population that are below the poverty line
HCI = H = Q/N
Poverty Headcount Ratio: Proportion county and Q is the poverty headcount, ratio H, is H =Q/N
- Rarely updated. (Real value does not change, tho nominal value does)
- Covid saw historic downwards trend in poverty change
- Urbanization might result overestimation: people in cities require less calories
- Does not take the degree/depth of poverty into consideration (distribution)
- And, disagreement for where poverty line should be
Measuring Poverty
What is the Poverty Gap?
See Lecture 03, page 02
Takes into account the degree of poverty (distribution):
(1) Measures the extent of pple that fall below the poverty line as a proportion of the poverty line.
(2) The sum of PG gives the minimum cost needed to eliminate poverty (3) (if transfered targettedly)
Calculating general income of the poor (yq) who are below poverty line (z) by multiplying by the poverty headcount Q results in Poverty Gap:
PG = [Q(z- yq)]/z
y_q - Mean income of the poor (averaged)
“z” absolute poverty line
Why divide by z?
Noramlize - (1) unitless and (2) measurement meaningful across countries*
Intuition behind formula:
- (z-y_q) ⇒ difference between poverty line and mean income poor
Measuring Poverty
How can the graph be creaeted for the Poverty Gap?
What does this say about distirbution?
- Above: distribution of income different (though $z$ same)
- Shaded Area: total money needed to eliminate poverty gap
Most commonly discussed solution: “Income must give each individual to be above the poverty line”
Measuring Poverty
What is Average Poverty?
Average poverty Gap APG, obtaining dividing PG by the population N:
AGP = Q/N (z-yq)/z = H(z-yq)/z
Comparable with Poverty Headcount ratio - measure poverty relative to general population
- Range: 0-1
- Gives average how much non-poor must give (tax) to eliminate poverty
- Normalized to population
Measuring Poverty
How is the treatment of poverty often oversimplified?
Treatment inequality oversplified → considers all citizens given country to be perfectly identical (aggregate) must take distribution into account (B&M 2002)
Measurement Issues
What are the three main issues involving the measurement of income?
- Measurement of income
- Use measure of consumption/expenditure
- Account regional differences (PPP) across and within countreis
What are the three main issues involving the measurement of income?
Issues with measurement of income:
- Measurement of income
- Use measure of consumption/expenditure
- Account regional differences (PPP) across and within countreis
- Measurement Error
- Required detailed survey dataHard to reach very rich/poor
- Developing countries not have the administrative instrustructure
- Informal sector: self-employed ex
What are the three main issues involving the measurement of income?
Issues measurement of consumption and expenditure
In comparison to measurement of income?
- Measurement of income
- Use measure of consumption/expenditure
- Account regional differences (PPP) across and within countreis
- Measure error not as bad
- Detailed survey data
- Better indicator of permanent income**More smooth and balanced over time****
Lead to: People over/under estimate income
What are the three main issues involving the measurement of income?
Why might income be under reported?
- Measurement of income
- Use measure of consumption/expenditure
- Account regional differences (PPP) across and within countreis
🧙🏼 Why might income be under reported:
- Disincentive to truth reveal (tax)
- Reporting, recall bais
- Tedious calculations
- Typically dont capture the most rich and poor
What is the difference between income and wealth?
Issue with Market Exchange rates and poverty lines:
Issue with using Market Conversion rates (See Lecture 02, page 03) is that it only reflects price of imported and exported (tradable) goods.
Note that non-tradable goods make up a section (particularly large in developing countries) economy
Therefore, Market Exchange Rates might be misleading in demonstrating living standards across countries
Need to use relative prices: PPP
Purchasing Power Parity (PPP):
> Calcualetd so typical basket of goods in two countries (including non-tradable) would have the same value in PPP exchange rate
- Representative of the relative expendature of living
- Limitations: only show average and not distribution (socially or geographically)
Other ways to measure poverty
What is the Mutidimentionnal Poverty Index (OPHI)?
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Health
- Nutrition
- Child Mortality
-
Education
- Years schooling
- School attendance
-
Living Standards
- Cooking fuel
- Improving sanitation
- Safe drinking water
- Electricity
- Cooking material
- Assets (livestock, land, etc)
Observe overlaps with HDI and Sustainability Goals