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Page History: 1.2 Poverty gap ratio

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Page Revision: 2011/02/14 14:02


Contents


GOAL AND TARGET ADDRESSED

Goal 1. Eradicate extreme poverty and hunger. Target 1.A Halve, between 1990 and 2015, the proportion of people whose income is less than one dollar a day.

DEFINITION AND METHOD OF COMPUTATION

Definition The poverty gap is the mean shortfall of the total population from the poverty line (counting the non-poor as having zero shortfall), expressed as a percentage of the poverty line. Concepts The poverty line is a common method used to measure poverty based on incomes or consumption levels. A person is considered poor if his or her consumption or income level falls below some minimum level necessary to meet basic needs. This minimum level is referred to as the "poverty line." The international poverty line for the calculation of this indicator is the $1.25 a day international line, converted to national currency units using the latest purchasing power parity (PPP) exchange rates for consumption (See Indicator 1.1). National poverty lines are defined differently across countries based on different calculation methods (See Indicator 1.1a). The purchasing power parity (PPP) conversion factor for private consumption represents the number of units of a country's currency required to buy the same amounts of goods and services in the domestic market as one United States dollar would buy in the United States. It is based on the System of National Accounts concept of actual individual consumption.

Method of computation The poverty gap ratio is measured as follows:



P0

 = 

1

  N
 ∑
   i=1

I (yi  z)

 * ( 1 -

yi

)

N

z

where P1 represents the poverty gap and is calculated as the sum of relative distance between the poverty line (z) and income or consumption for those who are poor (the non-poor have a poverty gap of zero). I(.) is an indicator function that equals 1 if the bracketed expression is true, and 0 otherwise. N is the total population. This formula is calculated based on data on individuals (yi as individual income or consumption). If household-level data are used, the formula has to be adjusted by the weight wi , which is the household size times sampling expansion factor for every household i. The poverty line used for this calculation can be either the international poverty line of $1.25 a day converted into respective national currency units at the latest PPP exchange rates for consumption, or the national poverty line.

RATIONALE AND INTERPRETATION

The indicator measures the “poverty deficit” of the entire population, where the poverty deficit is the per capita amount of resources that would be needed to bring all poor people above the poverty line through perfectly targeted cash transfers. Hence, the indicator is often described as a tool for measuring the per capita amount of resources needed to eliminate poverty, identifying the poverty depth in population groups which makes it a very useful indicator for policy makers and donors. The poverty gap indicator supplements the poverty headcount indicator in describing the poverty situation. The indicator values may range between 0 (no one is poor) and 100 (everyone is poor and has zero income). The larger the poverty gap, the poorer on average is the poor and the more resources are needed to lift everyone out of poverty. If two countries have about the same poverty headcounts, but the poverty gap estimate is much higher in the first than the second country, then the first country can be regarded as “poorer” than the second country. Poverty measures based on an international poverty line attempt to hold the real value of the poverty line constant across countries, as is done when making comparisons over time. Therefore, poverty gaps are comparable between countries.

SOURCES AND DATA COLLECTION

The indicator should be produced using nationally representative household surveys that are of good quality, contain sufficient information to produce a comprehensive consumption or income aggregate, and allow for the construction of a correctly weighted distribution of per capita consumption or income. For data sources, see Indicator 1.1.

DISAGGREGATION

It is sometimes possible to disaggregate this indicator by urban-rural location. In such cases, a clear definition of urban and rural areas needs to be established and included in the metadata.

COMMENTS AND LIMITATIONS

Limitations of this indicator include the following:
  • National poverty lines are the most precise determinants of the number of poor in a country according to national standards of living. However, they are set at different thresholds and hence are not comparable internationally. In order to compare poverty across countries, this indicator uses the international poverty line.
  • The international poverty line reflects for the ability to purchase a basket of commodities that is roughly similar across the world. However, the international poverty line is not suitable for the analysis of poverty within a country. For that purpose, a country-specific national poverty line needs to be constructed.
  • PPP exchange rates are used in the conversion of the $1.25 a day international poverty line into respective national currency units. PPPs are based on prices of commodities that may not be representative of the consumption patterns of the poor. As a result, there is no certainty that an international poverty line measures the same degree of need or deprivation across countries.
  • The reliability of the poverty estimates may be affected by the quality of the PPPs and price indexes used, which are subject to differences in survey sampling procedures, measurement errors, assumptions and approximations.
  • The price data from which the PPPs are calculated are supposed to reflect national average prices in each country. However, in many countries, price surveys are carried out mainly in urban areas. In those instances, differentials between the national urban and rural poverty lines should be used to adjust the PPPs to correct for the putative “urban bias.”
  • The quality of consumer price indexes around the world varies widely, which may affect the reliability of extrapolations over long periods of time and comparisons across countries.
  • Differences in the relative importance of consumption of nonmarket goods may affect the accuracy of poverty gap estimates. The local market value of all consumption in kind (including own production) should be included in total consumption expenditure. Similarly, imputed profit from the production of nonmarket goods should be included in income. However, such consumption is not always recorded.
  • Household survey questionnaires can vary widely making comparability difficult, and even similar surveys may not be strictly comparable because of quality differences.
  • This indicator measures poverty based on household per capita income/consumption and so measures the poverty gap at the household level. Intra-household inequalities are not reflected by the indicator.

GENDER EQUALITY ISSUES

See Indicator 1.1.

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