Unit 1 - Money-Metric Measures Of Poverty

Question 1

Why is consumption a better indicator for welfare than income?

Answer 1

Income is not an end in itself, in ables people to consume.

Consumption smoothing

Question 2

Why is income often underreported in household surveys?

Answer 2

1. No detailed record keeping (seasonal income, unknown relevat production costs, multiple small trades etc)
2. Forgetting to count in kind / non-monetised income
3. Resistance to report on full income (afraid it will be passed on to tax departments)
4. Poor design of surveys (linked to point 2)
5. Interviewee might not know income of all hh members / unequal intra-hh relationships are overlooked

Own experience: being classified as poor by the Government brings many advantages.

Question 3

What is consumption smoothing?

Answer 3

People do not live of their income, in times of shortages they may draw on savings/borrow and when the income recovers or increases they may save or repay loans.

Efforts are made to ensure that consumption fluctuates less than income.

Question 4

How is consumption measured?

Answer 4

By calculating expenditures on all goods and services plus non-monetised consumption (of own produced crops, housing etc) over a specific period.

Measurement is challenging due to recall periods.

Question 5

What is the difference between a relative and absolute poverty line?

Answer 5

Relative: defined in relation to the average income or consumption in a country. (Example UK 60% of median income)

Absoluut: absolute standard of what hh require in order to meet their basic needs.

Question 6

The basic steps in setting an absolute poverty line are:

Answer 6

1. Determine a collection (‘basket’) of essential items that allow people to satisfy certain basic needs
2. Estimate the cost of buying that basket of essential items

Question 7

Two types of absolute poverty lines:

Answer 7

1. Food poverty line - the cost of a food basket that satisfies some set of minimal nutritional requirements.
   Extreme Poverty
2. Non-food poverty line
   “The poverty line”

While there is often (for example WB) a separate poverty line for urban and rural areas which is typically 30% higher for urban.

Question 8

What is the International Poverty Line (IPL)?

Answer 8

IPL is the average of the poverty lines of 15 of the poorest countries in the world coverted to USD using the PPP exchange rate. (Purchasing Power Parity)

Developed by WB

1993 = 1.08 
2008 = 1.25 (2005 exchange rate)
2015 = 1.90 (2011 exchange rate)

Question 9

How is the IPL calculated?

Answer 9

IPLcurrent LCU = 1.25 x PPP2005 x [CPIcurrent/CPI2005]

LCU = local currency units
CPI = consumer price index

Question 10

What is PPP?

Answer 10

Purchasing Power Parity

The number of units of a countries currency necessary to purchase the ‘same amount’ of commodities as can be purchased for one unit of the base country’s currency at the base country’s prices’ (Reddy & Pogge, 2005)

PPP = Local cost of basket in LCU / cost of that basket in the USA in USD

Question 11

Two issues need to be addressed when analysing data on hh consumption:

Answer 11

1. Consumption needs vary accross individuals - results in the use of adult equivalence scales
2. There are economies of scale in certain kinds of consumption

Question 12

The 3 measures of poverty according to Foster, Greer and Thorbecke

Answer 12

P0 = Incidence of poverty = headcount ratio 
P1 = Depth = poverty gap index
P2 = severity = poverty severity index

P0 = proportion of population whose consumption falls below the poverty line (q/n)

P1 = incorporating the depth of poverty of those who are poor.

P2 = gives extra weight to the depth of deprivation of the poorest - it picks up changes in the distribution of income within the group of poor.

Question 13

the Foster-Greeg-Thorbecke formula

Answer 13

Pa = 1/n * sum i=1 till 1 ( (1-yi)/z )^a

P = poverty measure
N = sample size (number of people in population)
Q = number of people below the relevant poverty line
Z = the relevant poverty line
Yi = the income of person i (a person below the poverty line)

As X^0 = 1 therefore P0=q/n

Question 14

Alternative ways to convey the depth of poverty (being developed by the WB)

Answer 14

Person-Equivalent Poverty

This allows progress in poverty reduction (both incidene and depth) to be tracked in relation to a base year.

Question 15

Common problems when defining and measuring poverty:

Ruggeri Laderchi et al, 2003

Answer 15

1. Space - (material/social/political)
2. Universality
3. Objectiveness vs subjectiveness
4. Poverty lines
5. Unit - (family/individual - geographical)
6. Multidimentionality
7. Time horizon
8. Extent to which a definition of poverty offers a causal explanation for poverty and points to policies towards its alleviation.

Question 16

(Ruggeri Laderchi et al, 2003)

4 approaches to defining and measuring poverty

Answer 16

1. Monetary
2. Capability
3. Social exclusion
4. Participatory approaches

Question 17

The IPL changed over the years

Answer 17

PPP 1993 = 1.09 USD
PPP 2005 = 1.25 USD
PPP 2011 = 1.90 USD

Question 18

The P0, P2, P1 explained

Answer 18

Foster, Greeg, Thorbecke Poverty Indincators

P0 = proportion of people that is poor (under IPL) (doesn’t say how poor)

P1 = extend to which individuals fall below the poverty line as a proportion of the poverty line = minimum cost of of eliminating poverty if transfers were perfectly targeted. (Does not reflect changes in inequality). The larger the rate that comes out, the bigger the gap.

P2 = averages the square of the poverty gaps relative to the PL. Takes into account inequality. The poverty gap of 10% gets less weight than that of 50%. The larger the outcome the bigger the inequality.