CH2

Question 1

What are local poverty assessments?

Answer 1

Researchers trying to survey poverty in developing countries sometimes ask the people in villages who among them is poor.

Question 2

What is calorie counting?

Answer 2

Determining the minimal cost of 2,000 calories worth of food per day, the average daily number of calories humans need to estimate poverty in the community

Question 3

What is the poverty line?

Answer 3

The income required to purchase 2,000 calories of food, taking into account food habits and preferences. Those families or individuals with income below the poverty line are considered poor, whereas those with income above that line are not.

Question 4

What is a poverty headcount?

Answer 4

The number of people in a given population who are below the poverty line

Question 5

What is the equation for the Poverty Headcount Ratio?

Answer 5

H = Q/N

Question 6

What is the poverty gap?

Answer 6

The poverty gap assesses people below the poverty line according to their distance from the line.

Question 7

What is the equation of the Poverty Gap?

Answer 7

PG = Q(z - yq)/z

Question 8

What is the equation of Absolute Poverty Gap?

Answer 8

APG = (Q/N)(z - yq)/z = H(z - yq)/z

Question 9

How can we measure poverty across countries using exchange rates?

Answer 9

One method that compares poverty across countries takes a particular country’s poverty line and converts it into other countries’ currencies.

Question 10

What are non-tradeable goods?

Answer 10

All goods that are not exported and imported

Question 11

Why are non-tradeable goods important in exchange rate calculations for poverty?

Answer 11

Non-tradeable goods are very important for the poor because in developing countries, the poor are unable to buy expensive imported goods. As a result, currency conversions of poverty lines based on exchange rates may give a misleading comparison of living standards across countries.

Question 12

What are Purchasing power parity exchange rates?

Answer 12

Exchange rates which are calculated so that a typical basket of goods in two countries, including non-tradables, would have the same value when using the PPP exchange rate.

Question 13

What are the international challenges of surveys?

Answer 13

International comparisons are still an issue because surveys to determine the poverty line are done differently in different countries. In some countries, people are asked about their incomes, while in others, they are asked to report their expenditures.

Question 14

What is one dollar a day?

Answer 14

In an early study, Martin Ravallion from the World Bank and two co-authors noticed that national poverty lines in developing countries tended to be clustered around 1 dollar a day. The 1-dollar-a-day methodology that the World Bank has pioneered and used defines an international poverty line.

Question 15

What does Chen and Ravallion’s data show?

Answer 15

The latest estimates from the Chen and Ravallion team are from 2008.8 They use a poverty line of $1.25 a day based on 2005 PPP exchange rates. The data were constructed using 675 household surveys across 116 developing countries spanning the period 1981–2005.

Question 16

What are quantile measures?

Answer 16

Used for measuring income inequality. To divide the population of a country into income categories, researchers use quantile measures. Particular examples of quantiles are quartiles (4 groups), quintiles (5 groups), and deciles (10 groups)

Question 17

What is the quantile ratio?

Answer 17

A ratio of the average income in the highest quantile over the average income in the lowest quantile.

Question 18

What is the Lorenz Curve?

Answer 18

Plots the cumulative income share of different quantiles for the whole range of income distribution. The Lorenz curve indicates the cumula- tive share of income held by the cumulative share of the population.

Question 19

What is the Gini coefficient?

Answer 19

It is defined as twice the area between the diagonal and the Lorenz curve.

Question 20

What is the formula for G?

Answer 20

G = 1 - 2S

Question 21

What are some of the Economic Determinants of Inequality

Answer 21

1. Education and Income Inequality
2. Land Ownership and Income Inequality

Question 22

How is education a determinant of inequality?

Answer 22

Some countries have broad access to edu- cation while others do not. The idea of a link between education and income inequality is fairly straightforward: people with limited access to education will acquire less skills and consequently will earn lower wages than those with broader access.

Question 23

How is land ownership a determinant of inequality?

Answer 23

The distribution of land ownership is very important in the context of develop- ing countries in which agricultural production still plays an important role in their economies. Inequality of wealth leads to inequality of income. Those owning relatively large amounts of land will have a very high income while those owning little or no land will have a very low income.

Question 24

What is Kuznet’s Hypothesis?

Answer 24

Income inequality at first increases with economic development but later decreases as countries become wealthy.

Explanation: The reason why income inequality increases first is that only part of society grows out of poverty at initial stages of economic development. As some people become richer and others remain poor, income inequality must inevitably increase. Eventually, however, the effects of economic growth “trickle down” to the poor, whose living standards also increase, and inequality declines as a result.

Question 25

What does Kuznet’s curve look like?

Answer 25

According to the Kuznets hypothesis, income inequality is a non-linear function of income with an inverted U-curve relationship between economic development and income inequality.

Question 26

Cross-Sectional analysis

Answer 26

Usually, a Kuznets curve could be based on cross-sectional studies of world income distribution data.

Cross-sectional analysis assumes that all countries go through the same economic development process and that income per capita is the only vari- able determining income inequality.

Question 27

What is the equation of cross-sectional regression

Answer 27

Inequality(i) = a + by(i) + cy^2(i) + error(i)

y(i) is income per capita.

Question 28

What is Panel regression?

Answer 28

It is important to distinguish between the cross-sectional data and the time series evolution.

A panel regression is a regression technique that analyzes data variation across countries and across time is the most widely used method to make this comparison

Question 29

What is the equation for panel regression?

Answer 29

Inequality(it) = a(i) + b(i)y(it) + c(i)y^2(it) + error(it)

2 indices: i for country and t for time. We also have country-specific coefficients ai, bi, and ci. In particular, bi and ci will be the country-specific coefficients for the Kuznets curve

Question 30

Credit market imperfections

Answer 30

Income inequality being bad for economic growth can be explained using credit market imperfections. If a country’s poor are numerous and unable to borrow in order to engage in entrepreneurial activities, economic growth will be limited

Question 31

Political Economy

Answer 31

Another explanation for income inequality negatively impacting economic growth is based on political economy, the interaction between economics and politics. The basic political economy argument empha- sizes the negative consequences of greater pressures for income redistribution, especially in democratic countries where a majority of poor people can vote to tax the rich.

Question 32

Inequality over time

Answer 32

While inequality has increased over time in many countries in the last 30 years, income inequality worldwide has tended to decrease. The main reason is that as China and India, in particular, have had very strong economic growth, the incomes of billions of people have increased, thereby reducing worldwide income inequality.