Poverty and Inequality P1: Measurement, Concepts, and Theory

Question 1

Why Care about Poverty?

Answer 1

1. Poverty and Human wellfare
2. Distributive justice
3. Bad for growth and development

Extreme Poverty: influences risk and time prefernces
Negative correlation life satisfaction

Question 2

Study

Haushofer and Fern (2014)

Takewaways

Answer 2

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.

Question 3

How is Extreme Poverty defined

For different types of countries (from the World bank)

Answer 3

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

Question 4

Define the Poverty Line?

Answer 4

Poverty Line: (z) Calculating cheapest basket necessary baseline calories (using PPP)

1. Local Poverty Assessments: Survey populations in developing countries
2. **Calorie Counting: ** Determine minimum cost of 2,000 calories (Used World Bank, using PPP)

Question 5

Measuring Poverty

What is the Head Count Index and Ratio?

Answer 5

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

Question 6

Measuring Poverty

What is the Poverty Gap?

See Lecture 03, page 02

Answer 6

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

Question 7

Measuring Poverty

How can the graph be creaeted for the Poverty Gap?

What does this say about distirbution?

Answer 7

• 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”

Question 8

Measuring Poverty

What is Average Poverty?

Answer 8

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

Question 9

Measuring Poverty

How is the treatment of poverty often oversimplified?

Answer 9

Treatment inequality oversplified → considers all citizens given country to be perfectly identical (aggregate) must take distribution into account (B&M 2002)

Question 10

Measurement Issues

What are the three main issues involving the measurement of income?

Answer 10

1. Measurement of income
2. Use measure of consumption/expenditure
3. Account regional differences (PPP) across and within countreis

Question 11

What are the three main issues involving the measurement of income?

Issues with measurement of income:

1. Measurement of income
2. Use measure of consumption/expenditure
3. Account regional differences (PPP) across and within countreis

Answer 11

1. Measurement Error
2. Required detailed survey dataHard to reach very rich/poor
   • Developing countries not have the administrative instrustructure
   • Informal sector: self-employed ex

Question 12

What are the three main issues involving the measurement of income?

Issues measurement of consumption and expenditure

In comparison to measurement of income?

1. Measurement of income
2. Use measure of consumption/expenditure
3. Account regional differences (PPP) across and within countreis

Answer 12

1. Measure error not as bad
2. Detailed survey data
3. Better indicator of permanent income**More smooth and balanced over time****

Lead to: People over/under estimate income

Question 13

What are the three main issues involving the measurement of income?

Why might income be under reported?

1. Measurement of income
2. Use measure of consumption/expenditure
3. Account regional differences (PPP) across and within countreis

Answer 13

🧙🏼 Why might income be under reported:

1. Disincentive to truth reveal (tax)
2. Reporting, recall bais
3. Tedious calculations
4. Typically dont capture the most rich and poor

What is the difference between income and wealth?

Question 14

Issue with Market Exchange rates and poverty lines:

Answer 14

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)

Question 15

Other ways to measure poverty

What is the Mutidimentionnal Poverty Index (OPHI)?

Answer 15

1. Health
   
   1. Nutrition
   2. Child Mortality
2. Education
   
   1. Years schooling
   2. School attendance
3. Living Standards
   
   1. Cooking fuel
   2. Improving sanitation
   3. Safe drinking water
   4. Electricity
   5. Cooking material
   6. Assets (livestock, land, etc)

Observe overlaps with HDI and Sustainability Goals

Question 16

Income Distribution:

How to determine which country has more income inequality?

Answer 16

Have to look at distribution

Distribution of Income: How amount income relative poor, middle, rich often interpreted direct measure of welFare (can use average, relative to proverty, distribution)

Question 17

Methodology

Ways to measure income distribution

Answer 17

1. Lorenz Curve
2. Gini Coefficient
3. Kuznets Hypothesis

Question 18

Ways to measure income distribution

What is the Lorenz Curve?

Answer 18

Lorenz Curve plots cumulative income shared of different quantiles for whole range of income distributions (income vertically and population horizontally)

1. Depicts commulative distribution of income
2. Only see distribution

Cant compare income → only distribution

Egalitarian Distribution (Upper Bound) : (never happened) Most equitable

Inequlitarian (Lower Bound) Income where one person has 100% income

Therefore, bound for Lorenz curve between two exremes

How to Construct:

1. Determine cumulative share income
2. Plot line perfect equality
3. Plot cumulative distribution points

Question 19

Ways to measure income distribution:

What is the Gini coefficient?

Answer 19

> Twice the area between the diagonal and Lorenz curve (takes a value beween 0 - complete equality - and 1 - complete inequality)

• Countries low income of income distribution - low Gini coefficient

Formula (S area below curve; Area between diagonal and Lorenz curve 0.5G):

G = 1 -2S within the interval [0,1]

Question 20

Ways to measure income inequality

What happens when Lorenz curves cross ?

Answer 20

• Possible get same Gini for different distributions
• Cant compare Lorenz when crossing → inequalityMaybe see relative distributions in different income ranges

Question 21

Study

Bourguignon and Morrison (2002)

Answer 21

Look income distributions between 1820 and 1992

Findings:

1. Worsening income distribution 1820 → WWII
2. Stabalizing/worsened more slowly since WWII
3. 19th century: inequality due to within country
4. 20th century: inequality due to between countries

Note: trend reversal since publication - change to within country

Question 22

Ways to measure income inequality

Kuznets Hypothesis

Answer 22

• Effects of economic growth “trickle down” to poor
• U-shaped relationship between development/growth and inequality

Possible explanation: shifting out of agriculture

“Gets worse before it gets better”

BUT: little to no imperical evidence (Data shows no relationship; maybe even the opposite)

> Income inequality rises with economic development but later decreases as countries become wealthy

• Simon Kuznets

Income Vs. Wealth: might not have to work because too wealthy → no income but wealth

Question 23

Economic Determinantsof INequality

What are the two types of Economic Determinants of Inequality?

Answer 23

1. Education
2. Land Ownership

Question 24

Economic Determinants of Inequality

Education and Income Inequality

Answer 24

People limited access education will aquire less skills ⇒ lower wages

• Countries more education → less income inequality and more active political participation

(Causality between education and income works both ways)

Question 25

Economic Determinants of Inequality

Land Ownership and Income Inequality:

Answer 25

• Developing countries land distribution important: agricultural production plays very important role
• Clear correlation between income Gini and land Gini (expresses inequality of land ownership)