Meaning and Measurement of Poverty

What is economic growth?

An increase in average income in a country, necessary but not sufficient for raising the standard of living.

Define economic development, and what is it measured by?

The process of raising living standards, reducing poverty, and expanding opportunities through growth and structural changes. Occurs when the standard of living of a large majority of the population rises, including both income and other dimensions like health and literacy. Measured by the "Human Development Indicator (HDI)" by the United Nations Development Program (UNDP) based in New York City

What does the Human Development Indicator (HDI) measure?

It measures longevity (life expectancy), knowledge (educational attainment), and decent living standards (income).

What are the basic indicators of development?

Real income (e.g. poverty), health, and education.

What are the goals of economic development?

Removal of poverty, inequality, and sustainability.

Why are poverty and inequality considered detrimental?

They lead to economic inefficiency, undermine social stability, and are viewed as unfair.

What is the current extreme poverty line according to the World Bank (2025)?

$3.00 per person per day (2021 PPP).

What are the additional poverty thresholds for lower and upper-middle-income countries?

$4.20/day for lower-middle-income and $8.30/day for upper-middle-income countries.

How many people live below the extreme poverty line globally?

Approximately 808 million people, or ~9.9% of the world's population (~1 in 10 people).

What is poverty?

A multidimensional concept that includes both material and non-material well-being.

What is the poverty line?

It is defined as having a certain amount of dollars to spend per day which will guarantee a minimum basket of food, shelter, clothing etc.

What is absolute poverty?

The inability to meet subsistence essentials such as food, clothing, and shelter. They are counted as the total number living below a specified minimum level of income (Global poverty line).

Define relative poverty.

Inadequate income compared to the average standards of living in society, focusing on inequality rather than absolute deprivation.

How is relative poverty typically measured?

As income below 50% or 60% of the national median household income.

What changes more often and why? Relative poverty or absolute poverty?

Relative poverty changes more often and adjusts to the changes in society (food and housing becoming more expensive in certain areas, more jobs, etc.). In contrast, absolute poverty stays the same, and this could be problematic for absolute poverty when comparing neighborhoods that differ, and when comparing cross-nationally.

What is the calorie intake poverty line?

Defined as the income needed to consume the minimum required calories for subsistence. A household (or person) is considered poor if their income or consumption expenditure is insufficient to purchase the minimum required calories for healthy living.

What is the minimum calorie requirement for urban and rural areas?

2,100 calories per day in urban areas and 2,400 calories in rural areas.

What does the calorie Engel curve illustrate?

How calorie consumption increases with income at low levels but saturates at higher incomes.

What are the three indices generally used to measure poverty?

The headcount ratio, the poverty gap index, and the poverty gap squared index.

What is the headcount index/ratio?

An assessment that indicates the proportion of a population living below the poverty line.

What is the interpretation of HCR =q/N ∗100?

•The ratio of the number below the poverty line (q) to the total population (N).

•Fraction of total population living below poverty line.

•HCR =q/N ∗100
•Where q= number of people below poverty line
•N= total population (number of people in the country)

What is a limitation of the headcount ratio?

It is insensitive to the degree of poverty and distribution of income among the poor. It does not account for the severity of poverty among those below the poverty line.

How does the headcount ratio treat individuals close to the poverty line?

It assumes all poor are in the same situation. It treats them equally to those far below the poverty line, ignoring differences in well-being.

What does the Poverty Gap (PG) measure?

The PG measures the total income shortfall of the population below the poverty line.

What is the interpretation of PG = 1/N ∗q (Z-Yi)

•Where q= number of people below poverty line

•N= total population (number of people in the country)

•Z= poverty line

•Yi = income of individual i

What does the Poverty Gap Index (PGI) account for?

The PGI accounts for the intensity or depth of poverty among the poor.

How is the PGI interpreted if it is 0.20?

On average, the poor have an expenditure shortfall of 20% of the poverty line.

What is the formula to calculate the per capita cost of eliminating poverty using PGI?

The per capita cost is calculated as (poverty line Z) multiplied by (PGI).

What is a drawback of the Poverty Gap Index?

The PGI does not capture differences in severity of poverty among the poor.

What is the Squared Poverty Gap Index (SPGI), and what does it emphasize?

t's a variant of the poverty gap index that gives more weight to individuals (very poor) who are farther below the poverty line.

What is a key advantage of the SPGI?

The SPGI takes inequality among the poor into account.

What is a disadvantage of the SPGI?

The index is very difficult to read and interpret.

What is income inequality?

Income inequality refers to the disproportionate distribution of total national income among households.

What are some common measures of income inequality?

Common measures include quintiles, deciles, Lorenz Curve, Gini Coefficient, and Coefficient of Variation.

How to interpret quintiles and deciles?

•Divide the population into quintiles and successive quintiles or deciles according to ascending income levels and then determine the proportion of national income received by each income group

• Common measure of income inequality is the ratio of incomes received by the top 20% and bottom 40% of the population

What does the Lorenz Curve illustrate?

The Lorenz Curve shows the relationship between the percentage of income recipients and the percentage of total income they received during a time period (year).

What does a Gini Coefficient of 0 indicate?

A Gini Coefficient of 0 indicates perfect equality in income distribution.

What does a Gini Coefficient of 1 indicate?

A Gini Coefficient of 1 indicates perfect inequality in income distribution.

What are the properties of a Gini Coefficient?

• anonymity- should not depend on who has the higher income

•scale independence- should not depend on size of the economy or unit of income measurement (dollars vs Peso)

•population independence- should not depend on country's population

•transfer principles- transfer of income from rich to poor should make the distribution more equal

What is the Kuznets Ratio?

The Kuznets Ratio is the ratio of income received by the top 20% to that received by the bottom 40% of the population.

What is the Kuznets Inverted-U hypothesis, and why?

It suggests that income distribution worsens in early stages of economic growth but improves in later stages. Early growth may be concentrated in modern industrial sector, where employment is limited but wages and productivity are high.

In recent years, do we see any evidence of the empirical validity of the Kuznets inverted U-curve?

In recent years, there has been evidence due to more evidence, but previously, there was no evidence in the data.

What is the 'trickle-down' approach to economic growth?

The trickle-down approach suggests that benefits of economic growth will eventually reach the poor.

What is 'immiserizing growth'?

Immiserizing growth refers to a situation where the poor experience a decline in average income despite overall economic growth.

What is the relationship between economic growth and poverty reduction?

Empirical literature suggests that growth reduces poverty by improving education, health, and job opportunities for the poor.

What is the significance of the Gini coefficient in measuring inequality?

The Gini coefficient helps assess the degree of income inequality within a population.

What are the income classifications based on GNI per capita in 2023?

Low-income: $1,145 or less; Lower-middle-income: $1,146 to $4,515; Upper-middle-income: $4,516 to $14,005; High-income: over $14,005.

What is a key takeaway regarding the impact of growth on inequality?

The impact of growth on inequality is ambiguous and depends on the sources of growth.

What does the Coefficient of Variation (CV) measure?

The CV measures the relative variability of income distribution within a population.

What are the properties of the Coefficient of Variation (CV), and what is the CV often expressed as?

• anonymity- should not depend on who has the higher income 

•scale independence- should not depend on size of the economy or unit of income measurement (dollars vs Peso)

•population independence- should not depend on country's population

•transfer principles- transfer of income from rich to poor should make the distribution more equal

•often expressed as percentage

Is there a relationship between GDP and Gini coefficient?

No clear relationship between GDP and Gini coefficient.

What does the impact of economic growth (increase in GDP) on poverty depend on?

The impacts of economic growth (increase in GDP) on poverty will depend on the magnitude of income inequality in the country. The impact is bigger in countries where gini is smaller.